SONY (75 years of electronics history in 3 hours)

David Rosenthal 0:00 [chuckles] We keep biting off a lot in these episodes. [chuckles]

Ben Gilbert 0:03 I mean, you're telling the history of modern Japan.

David Rosenthal 0:04 We need to do a, like, two-year-old company. We need another FTX soon. [chuckles]

Ben Gilbert 0:08 Where, like, literally enough days haven't passed for us to make the episode long. [upbeat music]

David Rosenthal 0:14 Yeah. [chuckles] Exactly.

Speaker 0:15 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? Sit me down, say it straight. Another story on the way. Who got the truth?

Ben Gilbert 0:32 Welcome to season ten, episode three 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.

David Rosenthal 0:47 And I'm David Rosenthal, and I am an angel investor based in San Francisco.

Ben Gilbert 0:52 And we are your hosts. Listeners, today, we are telling the story of the company that Steve Jobs idolized and modeled Apple Computer after, the Sony Corporation.

David Rosenthal 1:03 Literally modeled himself after. [chuckles]

Ben Gilbert 1:06 [chuckles]

David Rosenthal 1:06 You know the story, right, of the black turtlenecks and the Sony connection?

Ben Gilbert 1:10 Enlighten us.

David Rosenthal 1:11 [chuckles] Well, so the story goes that Steve idolized Sony, went over to visit, and saw that there was a uniform that Sony employees had, and he was like: "That's a great idea! I want Apple to have a uniform. Where did you get that [chuckles] uniform?" And so he brought it back. He, like, made a proposal to Apple, and people were like, "NFW." [chuckles]

Ben Gilbert 1:36 And didn't the Sony employees have uniforms because, like, clothing was scarce after World War II?

David Rosenthal 1:41 [chuckles] 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 Issey Miyake, the famous Japanese designer, who had made the Sony uniform, and got him to make him a hundred black turtlenecks.

Ben Gilbert 1:57 Amazing. There's so much about our generation that we remember from Sony growing up: the Trinitron TVs, DiscMans 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.

David Rosenthal 2:17 As well as Sony headphones right now, right?

Ben Gilbert 2:19 That's right.

David Rosenthal 2:19 Yeah.

Ben Gilbert 2:20 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. David, did you know that they own a division that exclusively makes a tiny dog robot?

David Rosenthal 2:35 [chuckles] I did know that.

Ben Gilbert 2:37 [chuckles]

David Rosenthal 2:37 Do they still make that thing?

Ben Gilbert 2:39 Yeah, they do.

David Rosenthal 2:40 You might say it's the Tesla bot of old, the precursor.

Ben Gilbert 2:43 You might say that, yes. 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're the largest music publisher and the second largest record label, which, for those of you who listened 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. So we have a wild story going all the way from World War II to Spider-Man to tell you here today. But first, we wanna introduce you to our presenting sponsor, Vanta, the leader in automated security and compliance. Now, as you know from the T-Swift episode, we are huge fans of Vanta and their approach to the whole compliance process: SOC 2, HIPAA, GDPR, and more. And we've got CEO and co-founder Christina Cacioppo back with us today. Well, Christina, you've shared with us how SOC 2 came to be. What is the traditional way that people go about getting a SOC 2 certification, and how is Vanta different?

Speaker 3:49 Pre-Vanta, step one was, again, go read the SOC 2, uh, standard, see the, like, "We solemnly swear we protect data in a good way." Uh, figure out what that means for your company. Go and do that. Try to make sure that you've really done that. Call in an auditor who's gonna come in and ask and say: "Hey, you said you solemnly swore this. Now prove it to me." And you might say: "How do you prove this?" And you're like, "Ah, well, you know, show me that you've encrypted all your, you know, data at rest in AWS, that you use SSL on your websites, and it's up to date," you know, this, that, and the other. "Show me that by logging into these systems and taking screenshots. Mail them to me." You know, you'll mail this person hundreds of screenshots. They will say: "Thank you so much," uh, you know, go back to their office or their home office, look at all the screenshots, and, you know, write this up into, like, a seventy-page report that roughly says, you know, "We went to the company and saw that they have these practices and confirmed they're in place, and so you can trust them." That's really how it works. [chuckles] It's always surprising when you explain that to people in software. These are not things that, you know, founders enjoy doing or honestly can, can justify prioritizing. Um, I think this is just part of why startups didn't get SOC 2s until a few years ago. So we looked at that as kind of engineer product managers, and we're like: "Well, that seems inefficient." [chuckles] Like, I could build you some tools for that. And if you wanna think about the security of a company or whether they're trustworthy, looking at screenshots from last Tuesday is probably reasonable for last Tuesday, but, you know, it doesn't tell you anything about today or tomorrow or next month. So what we did with Vanta was break down the standard, figure out, you know, a... we call it sane default of a definition. Then we connect with the tools the company uses, so AWS, G Suite, GitHub, et cetera, et cetera, et cetera, pull configuration information out, so we can be like: "Are you actually encrypting, you know, data at rest?" That's helpful to the company 'cause they can see how far along they are, what they're doing. It's helpful to the auditor because they, they can see all of that, too, and in much higher fidelity than they got historically, and so it's easier and faster for them to write that seventy-page report, um, and give it to the company to accelerate the company's sales.

Ben Gilbert 6:05 ... Our thanks to Vanta, the leader in automated security and compliance software. If you are looking to join Vanta's two thousand plus customers to get compliance certified in weeks instead of months, you can click the link in the show notes or go to vanta.com/acquired for a ten percent discount.

David Rosenthal 6:22 Such a great company story, Vanta.

Ben Gilbert 6:23 Truly. We also wanna 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, thanks, Taylor, you should make it official and join the eleven thousand other smart folks at acquired.fm/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. 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.

David Rosenthal 7:10 We're gonna discuss just about, like, every industry [laughing] under the sun today.

Ben Gilbert 7:14 [laughing] Right.

David Rosenthal 7:15 Oh, my! Well, first, we start back in the summer of 1944, in the Tsukishima neighborhood of Tokyo, in Japan, right next to Tokyo Bay. I think this is right near where the fish market is-

Ben Gilbert 7:36 Hmm.

David Rosenthal 7:36 -if you've ever been there, I believe.

Ben Gilbert 7:38 I haven't. I've never been to Japan.

David Rosenthal 7:40 No way! Oh, you gotta go. We should do an Acquired trek.

Ben Gilbert 7:42 We totally should.

David Rosenthal 7:43 Jenny and I went there on our honeymoon. It was so, so awesome. We did Kyoto, we did Tokyo. Oh, it's wonderful.

Ben Gilbert 7:50 Oh, nice.

David Rosenthal 7:51 So there, in the summer of 1944, obviously, most people are, uh, realizing right now there's [chuckles] quite a, yeah, big worldwide thing happening in the summer of 1944 that Japan is intimately involved in, that would be World War II. There, 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 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, not only because they're not... You know, these are not, like, military nationalist people. They- I think both of them probably believed that the war was a terrible thing for everybody, and it certainly was. But they also are particularly [chuckles] not into the war because they're pretty certain that when, uh, you know, 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.

Ben Gilbert 9:05 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 Morita himself, who we're 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, 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 in their, you know, technology revolution."

David Rosenthal 9:40 Yeah. I went and I looked up population statistics from the World War II era, and Japan had about seventy million citizens before World War II. The US only had about one hundred and thirty million. So, like, yes, America was bigger, but not, like, way bigger. It wasn't like: 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 [chuckles] more people.

Ben Gilbert 10:04 [chuckles]

David Rosenthal 10:04 Uh, but no, it was specifically that the technology was just so much farther advanced in America than anyw- anywhere else in the world, especially Japan at the time.

Ben Gilbert 10:13 Yep.

David Rosenthal 10:14 So you referenced Akio Morita. He is 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 Masaru Ibuka, and he is a prototypical engineer's engineer. Like, this guy loves technology. [chuckles] I can't remember if it was Morita or somebody else in one of the books I was reading, lovingly referred to him as a dreamer. [chuckles]

Ben Gilbert 10:43 Yeah, it's so right that Morita, while he does have a physics background and he's definitely a engineer, [chuckles] it is right to say that Ibuka is the engineer's engineer, and Akio 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.

David Rosenthal 11:01 You might say that Ibuka is like the Woz, and Akio Morita is like the Jobs.

Ben Gilbert 11:08 That's a great comparison. Yes-

David Rosenthal 11:10 So-

Ben Gilbert 11:10 You might

David Rosenthal 11:11 ... Ibuka loves technology, and particularly, he is fascinated at this point in time by radio and all of the applications of radio. This was, like, one of, if not the major technological paradigm of the '20s, '30s, '40s. And due to his proficiency in radio, when the war started, the military and the Japanese government made shortwave radios illegal in Japan. Now, this is also [chuckles] paradoxical. I learned all this. Did you know that, um, shortwave radios are actually long-distance transmission?

Ben Gilbert 11:48 I did. When I was a kid, my dad and I used to try and pick up shortwave 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.

David Rosenthal 12:00 Yeah.

Ben Gilbert 12:01 But isn't the spirit here of doing this so that consumers can't listen in on... I didn't know if it was the Allies' signals or the Japanese's military plan?

David Rosenthal 12:11 Exactly. I think a lot of governments did this during World War II, but certainly the Japanese government. They didn't want their citizens listening to propaganda from-... the Allies or other countries, which of course, you know, the Americans and others were broadcasting all [chuckles] around the world.

Ben Gilbert 12:25 If you're gonna listen to propaganda, it has to be our propaganda.

David Rosenthal 12:28 So they literally made it illegal to sell, buy any shortwave-capable radios that consumers had. They had to take out components that received shortwaves.

Ben Gilbert 12:39 I think a lot of it was the government officials who were coming around to modify the radios were just clipping wires.

David Rosenthal 12:45 Yeah. Yes.

Ben Gilbert 12:45 Like, some of it was modifying components, removing it, but other ones, they'd just go in and be like: "Oh, yeah, there it is." [snips]

David Rosenthal 12:51 Ibuka, though, he's just like: "All right, sure, whatever. You can clip as many wire- of my wires as you want. I'm just gonna keep making my own shortwave radios." So he knows through that, he can listen to transmissions from the Allies and others, and he knows that despite what the government is saying in 1944, the war is not going well for Japan.

Ben Gilbert 13:08 When we say radios, the thing to picture, listeners, is, like, reasonably large, high-power, not portable radios that use vacuum tubes. It is an appliance to have a radio at this point in history.

David Rosenthal 13:21 So, okay, so that's Ibuka. The other engineer, of course, is Akio Morita. It's pretty amazing that he finds himself here in this place, in this moment, because he is the eldest son of the 15th generation of the Morita family of Nagoya, which is the family that controls one of the largest sake empires in Japan, and literally for 400 years, his family has been running this business 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 run, like, the area. [chuckles]

Ben Gilbert 14:04 I mean, there are old companies, and then there are Japanese old companies.

David Rosenthal 14:08 Yes. [chuckles]

Ben Gilbert 14:09 I don't think there is a family business in the US that is as old as this company, either in terms of generation or years.

David Rosenthal 14:19 The US isn't 400 years old. [chuckles]

Ben Gilbert 14:21 Yes, exactly, and [chuckles] I mean, and part of it is, like, you know, there are umbrella shops in London older than our country. But yes, the Japanese, and in particular, Japanese sort of family businesses, think on a 10X timeline to the way that we sort of think about them in the US.

David Rosenthal 14:35 And the way it works is that the oldest son of each generation, they literally have to change their name to-

Ben Gilbert 14:42 Kyuseimon

David Rosenthal 14:43 ... when they take over the business, and then they become, like, the head of the family and the head of the business. And so Akio is- he's destined, like, he's born into this, that he's [chuckles] gonna take over the sake business.

Ben Gilbert 14:57 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: "Boy, you sure are interested in physics for someone who is 100% going to take over our sake and soy paste business at some point."

David Rosenthal 15:13 Yep. But at age six, he starts going to business meetings with his father, and then at age 10, he starts attending all board meetings of the business. [chuckles] So he gets a real business education alongside his interest in engineering and electronics and tinkering. But unlike his father, you know, uh, Akio's growing up in the '20s and '30s, they're a wealthy family. They're getting all this American technology into their house. They're getting American radios. For Morita, the big moment was when they got an American phonograph and records, 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 to sort of ceremoniously release him [chuckles] from his duty and his destiny to take over the business, which his father does, and by all accounts, is very, like, understanding about this. Shockingly so, and Morita goes off to study physics and engineering instead of 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.

Ben Gilbert 16:26 Yeah.

David Rosenthal 16:27 Because when Pearl Harbor happens in 1941, Akio is 20 years old, so, like, if he hadn't gone into engineering and studied physics, well, what he is able to do is he's able to join the Navy as an engineering researcher and get assigned to work on technology, weapons research projects like he ultimately does-

Ben Gilbert 16:48 From the lab

David Rosenthal 16:48 ... in 1944. From the lab. [chuckles] If he hadn't done that, he probably would've gotten stuck on a boat, and very, very high chance that he would've been killed.

Ben Gilbert 16:57 I think they even say, either in the Sony book by John Nathan or in Akio Morita's book, that his younger brothers were actively sort of training to be kamikaze pilots. Like, that would have been his future.

David Rosenthal 17:13 Yes. There is still quite a high price, though, that Morita has to pay for landing in this relatively plum and safe assignment. He has to sign up for lifetime employment with the Navy as an engineering researcher in order to do this, but, A, he feels like he has no choice, and, B, he loves engineering and loves research, so-

Ben Gilbert 17:37 Yep.

David Rosenthal 17:37 Okay.

Ben Gilbert 17:38 Yep. It's what I wanna do.

David Rosenthal 17:40 Now, we fast-forward to August 15th, 1945. The US, in the week prior, has just dropped two atomic bombs on Hiroshima and Nagasaki. The reaction that Morita 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. 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."

Ben Gilbert 18:27 ... 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, 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 knowing what I know, even though the government isn't sharing it widely yet?"

David Rosenthal 19:01 Yeah, and there's a whole story that I didn't put in the notes here, but it's in the book. Everybody should go read the book. It's, it's really, really great.

Ben Gilbert 19:07 It's the Shoe Dog of the '80s, truly. [chuckles]

David Rosenthal 19:10 [chuckles] It is, it is in many ways. But he goes home to his family at that point in time, and, uh, he's worried that the military's gonna order all officers to, uh, commit suicide rather than surrender.

Ben Gilbert 19:24 In a part of the surrender, yeah.

David Rosenthal 19:25 Yeah, and so he tells all his colleagues when he goes home, he's like: "Look, [chuckles] what this means, this bomb, like, don't, don't do that. Like, it's over. It's over."

Ben Gilbert 19:35 Oh, and he says, "Depending on what the orders are, I may not come back and rejoin you."

David Rosenthal 19:40 Yeah.

Ben Gilbert 19:41 You can see what a cowboy he is already. I mean, the classic imperial Japanese response there would be, "It is my duty to come back and 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."

David Rosenthal 20:06 Yep. So, you know, I said August 15th. Well, that, that's not when the bombs are dropped. What happens on August 15th, that is when the Emperor goes on the radio in Japan and announces that Japan is surrendering and asks, you know, everybody to surrender, and 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. By contrast, less than five hundred thousand Americans died in the war, so it's pretty bad.

Ben Gilbert 20:47 And outside of just Hiroshima and Nagasaki, which, you know, is just so awful, I mean, the darkest moment in human history, what happened there, 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 all Japanese urban citizens, even in Tokyo, are homeless.

David Rosenthal 21:11 Yes, forty-seven percent of Tokyo citizens are homeless at this point. The per capita income in the country the next year in 1946, the first year after the war, is seventeen dollars.

Ben Gilbert 21:23 You can inflation adjust all you want, you are not gonna make that a meaningful number.

David Rosenthal 21:27 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. So Morita goes back home to Nagoya. Ibuka 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. But he goes right back to Tokyo amidst all this, and what does he do? He founds a company. [chuckles] He's like... And, you know, I think part of his vision, Morita would contribute to this, too, but I think Ibuka really saw a huge opportunity after the war in that all this technology that 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. 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.

Ben Gilbert 22:30 This is the moment where we realize that Ibuka is truly an irrational optimist. The national tenor couldn't be more bleak, and yet 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."

David Rosenthal 22:49 And half of them don't even have homes. [chuckles]

Ben Gilbert 22:51 Unbelievable.

David Rosenthal 22:52 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 in full consciousness of their joy in technology and their social obligation." [chuckles] There's this question, well, what, what is he gonna name the company? He, of course, comes up with the brilliant name Sony. No. [chuckles] He names it the Tokyo Telecommunications Research Institute, befitting of his goals.

Ben Gilbert 23:22 Yep. Sounds like something founded by a former military academic.

David Rosenthal 23:26 Yes. 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?

Ben Gilbert 23:39 Which is not a part of the founding prospectus. That's the best thing, is like, "Oh, no, we don't have an idea."

David Rosenthal 23:44 There's nothing in it. [chuckles]

Ben Gilbert 23:44 "We have a lot of engineers." [chuckles]

David Rosenthal 23:46 We just wanna, like, have a place where engineers can be engineers.

Ben Gilbert 23:49 Yes.

David Rosenthal 23:50 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 a electric heating blanket. That also doesn't work for various reasons. And then, finally, they get the brilliant idea. It was obvious, if only they'd 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. [chuckles]

Ben Gilbert 24:12 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 them to make them unclipped, at the very least, for the easy, low-hanging fruit, that seems like a business.

David Rosenthal 24:25 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-... they start doing this, and things go well. Go well enough that they actually get a little write-up in a national newspaper at the time about the service that they're offering, and, uh, you know, how high quality their work is.

Ben Gilbert 24:55 I doubled down on service there. I think eventually they do come out with products, too, that people can sort of like modify their radios by attaching this product, and it turns into a shortwave, uh, antenna or something like that.

David Rosenthal 25:06 Yes. Who reads this article but Akio Morita, [chuckles] who's back home in Nagoya. He reads it, and he's like, "Ibuka! He's created a company. He's created this haven for engineers. I would kill to work with him again." So he writes Ibuka and says that he wants to come to Tokyo and, quote, "Be of service" to him and the company. [chuckles]

Ben Gilbert 25:31 [chuckles]

David Rosenthal 25:31 What does he mean? Why does he say, "Be of service?" Well, one, he sort of figured that, you know, money was tight then and the, the new company might not have enough money to employ him. But the bigger problem was, it's pretty unclear what the status of, uh, Morita'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. It's unclear.

Ben Gilbert 26:00 Not to mention... So there are, like, twenty engineers at the company already, even though they really can't make much money doing much of anything. So the company is, like, kind of established. So even though Akio is like, "Hey, remember when it was sort of you and I working on this thing together?" I'm reading between the lines a little bit, but I think he's a little bit, like, searching for signal on, "Does Ibuka want me?" Like, you assembled a team of twenty, and after that-

David Rosenthal 26:27 Right, you didn't reach out to me.

Ben Gilbert 26:28 -bond that we had. Yeah. So it sort of never comes up again. They're thick as thieves, you know, forever after this, but it is sort of interesting to me that Akio Morita was not one of the first fifteen, twenty people at the company.

David Rosenthal 26:42 Yeah, you're right. Nobody really, like, knows why. The speculation in some of the books and things I read are just that Ibuka really is just kind of a dreamer, and, like, he just might not have thought [chuckles] about Morita. But once Morita writes him, he's like: "Oh, yes, I definitely want you here."

Ben Gilbert 26:59 Yep. The company, by the way, if you go to Sony's website, they have meticulously maintained corporate archives, and if you go and 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 on and let you read the founding prospectus. They've maintained this stuff for, you know, seventy-plus years.

David Rosenthal 27:21 Yeah. Ah, we should go do that someday.

Ben Gilbert 27:23 Yeah.

David Rosenthal 27:24 Okay, so what does Morita do? He finagles an assignment in the military, quote-unquote, to get a teaching assignment 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 needs to be purged out of government, but also out of education.

Ben Gilbert 27:51 Which is totally fascinating, right? This idea where if you're the occupation government, that's sort of like helping the country heal. [chuckles] 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 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.

David Rosenthal 28:19 It's just so hard to imagine, like, what life was like and through those events.

Ben Gilbert 28:24 We have been very fortunate in the place or, and time that we have grown up, for sure.

David Rosenthal 28:28 Totally. So anyway, [chuckles] it, it works. The strategy works for Morita. He gets purged, [chuckles] quote-unquote, uh, from his job, and he's a, a free agent again, or sort of a free agent. [chuckles]

Ben Gilbert 28:42 [chuckles]

David Rosenthal 28:42 I just have Taylor Swift on my mind and her story because of our recent episode. But literally what happens next is like a big machine moment. Morita and Ibuka, 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, it's unclear if he actually needs to go back to the family business or not.

Ben Gilbert 29:01 Ah, yes.

David Rosenthal 29:01 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 to leave the family. They also need some money, [chuckles] some capital in this, uh, new company that they're sort of restarting together.

Ben Gilbert 29:19 You can tell that this is very important to Ibuka because Ibuka goes to the family dinner with Akio. [chuckles]

David Rosenthal 29:25 Yes. So they both get on the train, they go to Nagoya. [chuckles] They go have, you know, family dinner. They ask for Akio's father's blessing for him to become partners with Ibuka in this new venture. They get the blessing and a hundred and ninety thousand yen investment in the new startup company. And over the next couple of years, the Morita family would put a little more money in over time and eventually own seventeen percent [chuckles] of the company. [laughing] I don't have the exact dates here, but even by, like, the, you know, early 2000s, the Morita family still, I believe, owned about ten percent of Sony.

Ben Gilbert 30:06 Yes, as of 1999, the family controls a ten percent share, which at the time was worth roughly five billion dollars.

David Rosenthal 30:15 The question is, what's worth more, the Morita sake empire or the ten percent stake in Sony?

Ben Gilbert 30:21 The ten percent stake in Sony.

David Rosenthal 30:23 Well, it depends what years you're talking about here. [chuckles]

Ben Gilbert 30:25 That's true. That's a very good point. To- yeah, Sony had some dark years in the future.

David Rosenthal 30:29 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, at-- It's a add-on business at best.... So they're looking for a real product to make. In 1949, shortly after this, Ibuka gets a chance to see an American tape recorder 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 Ibuka got to see, is the company Ampex 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. 3M is the leading manufacturer of tape for tape recorders.

Ben Gilbert 31:21 Which is the Minnesota Mining and Manufacturing Corporation?

David Rosenthal 31:25 Yes. Both of these companies are making huge amounts of profit on this new technology. So Ibuka comes back and is like, "Akio, [chuckles] well, I've seen the future. We gotta make this." And Morita 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, and we should also make the tape." [chuckles]

Ben Gilbert 31:49 Yeah, if we're doing it, we better be doing both. The other thing to say is, 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, picture something about the size of, like, a small table, and this is not a cassette tape recorder, this is reel-to-reel. 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.

David Rosenthal 32:20 Yep, and it's all audio at this point.

Ben Gilbert 32:22 All audio. Yep.

David Rosenthal 32:23 So through some of the family connections, both from Morita and Ibuka's father-in-law had been a minister in 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, [chuckles] 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 a factory. [chuckles]

Ben Gilbert 32:52 And that was to make the, like, magnetic coating that would go over them, that you would then actually record on. I think they were trying to use... 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.

David Rosenthal 33:13 Once they get the product right, they're able to get first into the court system 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, TTEC, with their tape recorders. So they build a pretty sizable business in the Japanese market making these.

Ben Gilbert 33:39 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 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." [chuckles] And it's like a, a little bit of an accident of history, they actually found a use case for it.

David Rosenthal 34:04 Totally. Yeah, I believe the first product cost a hundred and sixty thousand yen per recorder. You basically gotta be selling to the government at that point in time.

Ben Gilbert 34:13 Right. I don't know how to, uh, think about that in terms of the dollars then or dollars now, but it's thousands and thousands of dollars.

David Rosenthal 34:20 Yep. Well, the Morita 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.

Ben Gilbert 34:31 Okay, so that at least gives you some context. Yeah.

David Rosenthal 34:34 Okay, so this goes along for a couple of years. They're building up the company, and then the big, big break. In 1952, Ibuka hears that the world-famous renowned institution that everybody respects, and especially nobody more than Ibuka and Morita in Japan, Bell Labs, that the then parent company of Bell Labs, which is a company called-

Ben Gilbert 35:07 Western Electric?

David Rosenthal 35:08 ... Electric, yeah. Uh, it went through a whole bunch of owners, and it was all related to AT&T and the various entities as part of that. That they were going to open up the transistor for international licensing. And of course, they had created the transistor in Bell Labs, that they were gonna license the technology internationally.

Ben Gilbert 35:29 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 when-- once we get to the integrated circuit, it's so wildly different than 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 at the same time. So once this thing gets invented and y- 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.

David Rosenthal 36:01 Keep in mind what we were saying 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 Ibuka is like: "This is it." You know, 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." [chuckles] And Morita's like: "Okay." So Morita goes off to New York, this is, I believe, in 1953, 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, and the Bell Labs guys are like: "Well-... What, what, what are you gonna do with it? [chuckles] And Ibuka and Morita are like, "We're gonna make miniature radios with the transistor." And they're like, "Guys, you can't do that. Like, we're- 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."

Ben Gilbert 37:12 Oh, yeah, hearing aids, that's right. And Ibuka and, and Morita are like, "Ah, 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.

David Rosenthal 37:27 They knew for lots of reasons that there was no chance that they could build a big company, a big product, making hearing aids.

Ben Gilbert 37:33 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."

David Rosenthal 37:44 They're nothing if not confident, and so Bell Labs is like: "All right, well, good luck, guys." [chuckles] It takes two years, but two years later, in August of 1955, TTEC releases their first transistor radio product, the TR-55 portable radio. Now, this was actually not the first transistor radio in the world. A American company called Regency had worked with TI to make-

Ben Gilbert 38:16 Ah

David Rosenthal 38:16 ... a transistor radio in the US. So like the Bell 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, they didn't invest a lot in the product, and it never, like, became a big thing for them. Sony, they [chuckles] soon to be Sony, is all in on this idea of, like, if we can shrink this down, people can take it with them, it can be portable. This will be great. So leading up to the release, they know- they're like, "This is gonna be our big consumer product." [sighs] Tokyo Telecommunications Engineering Corp doesn't really just, like, roll off the tongue-

Ben Gilbert 38:56 Roll off the tongue. [chuckles]

David Rosenthal 38:56 - anywhere, and especially not in English or, you know, other markets around the world, where ultimately we wanna be selling products all around the world. Uh, so, like, we need, we need a new name. They literally start going through the dictionary [chuckles] looking for new names, and eventually they come across the Latin word sonus. And they're like: Well, that's interesting. That sounds interesting.

Ben Gilbert 39:21 It means sound. It sounds cool.

David Rosenthal 39:24 Yep. What do we do? We make technology focused on sound. Well, maybe we could do something with that. 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.

Ben Gilbert 39:43 Yeah, it was, uh... Sonny Boy was being used a lot, and you could sort of hear a lot of young people out, out in the streets in the neighborhood saying, "Sonny boy," 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 Sonny or Sonny Boy would sort of appeal, and so wanted to merge this powerful sonus with Sonny Boy.

David Rosenthal 40:09 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.

Ben Gilbert 40:16 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.

David Rosenthal 40:33 I love it. It's so good. It's such a brilliant... Like, it works in every language, every culture around the world, and it really becomes, you know, synonymous with innovation for decades. So they release the TR-55. 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. Ibuka has this vision of, he wants 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.

Ben Gilbert 41:11 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.

David Rosenthal 41:17 Yes, exactly. I think a lot of people do this, just walk around with, like, their phones playing music on speaker and... [chuckles]

Ben Gilbert 41:23 Oh, yes, people do do that. [chuckles]

David Rosenthal 41:25 This is where it starts.

Ben Gilbert 41:27 Especially on hikes in the woods.

David Rosenthal 41:29 So two years later, they come out with the next version of the product, the TR-63, and this thing is a monster. So Ibuka, you know, he has this vision of fitting in the shirt pocket. It's just slightly larger than a standard, like, man's, you know, dress shirt pocket. So he and Morita really want this to be the narrative. So they [chuckles] outfit their sales force. They have, they have the Sony sales force that sells the products to, you know, the distributors and the retailers. They get special custom shirts made 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.

Ben Gilbert 42:06 Again, the Steve Jobs parallel, like the showmanship of that, you know? It's like the MacBook Air in the envelope.

David Rosenthal 42:11 Totally. So consumers go nuts for this, first in Japan, where they launch it first. Ultimately, the TR-63 ends up selling one point five million units at twenty-five dollars each, which is... I 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, this is orders of magnitude larger than the tape recorder business.

Ben Gilbert 42:40 Right. They've got a real corporation on their hands now.

David Rosenthal 42:42 Yep. The company grows to twelve hundred employees, the newly named Sony Corporation. And of course, like, the big thing that they wanna do, for many reasons, not the least of which is that America is the largest consumer market in the world at this point, they wanna bring the product to America.... So Morita comes back over to 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." And he, uh, connects with the Bulova Watch Company, which I hadn't heard of it. The brand still exists today. Ironically, the Bulova watch brand is owned, I believe, by Citizen Watches, which I believe is a Japanese company. [laughing] 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 100,000 units that we're gonna bring over to America and sell through our channels." I mean, that's, like, huge.

Ben Gilbert 43:46 Morita's like: "Am I hu- sorry, what? How, how many? We- what, uh, uh, how on earth are we gonna make that many?" [chuckles]

David Rosenthal 43:54 Yeah, that is a huge, huge order. And Bulova's like: "Well, yes, we want that many, but there's just, you know... The thing is, like, naturally, we're gonna be this big business partner for you. We, we want it to be the Bulova TR-63. We wanna put our brand name on it."

Ben Gilbert 44:14 Hmm.

David Rosenthal 44:15 And I think Morita would later say that this was the single, like, biggest and best business decision of his career. He turns them down and says, "Nope, you can sell the Sony TR-63 or you can sell nothing."

Ben Gilbert 44:30 It is really brilliant. I mean, it is a mark of what was to come and also something that truly defined the company, because company culture and company values don't mean anything until they're tested. And when, 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, you know, be a white label OEM product. But I think when you're really tested 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.

David Rosenthal 45:11 Oh, [chuckles] that's right. Oh, my goodness, I forgot about that.

Ben Gilbert 45:15 There was that, like, iTunes phone that was actually a Motorola phone that was a piece of crap.

David Rosenthal 45:20 Oh, yeah, the ROKR.

Ben Gilbert 45:20 Yeah, the Moto ROKR. That's right. But the HP iPod truly was just an iPod with an HP logo on the back.

David Rosenthal 45:27 Did it have any special colors or anything? I remember I had the U2 iPod that was black and red. That thing was awesome.

Ben Gilbert 45:32 That was cool. I had that, too, yeah, 'cause that was-- I think that was predated Product Red, but would sort of become Product Red.

David Rosenthal 45:39 Yep, I think that's right. So ultimately, what that leads to is, a couple years later, Morita 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 a Sony operation in America." So they start the Sony Corporation of America in 1960, and Morita actually moves to New York City. Originally, the intent was he and his family were gonna be there for two years and set up 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.

Ben Gilbert 46:20 It is interesting how, I think, his US license plate when he moved here was AKM, which is the sort of hint that he did always think about himself as the Kyuseimon of the family.

David Rosenthal 46:34 It was AKM15.

Ben Gilbert 46:36 Oh, the fif- like, right, 'cause he's 15th generation.

David Rosenthal 46:39 The 15th generation. [laughing] Yep, yep. [chuckles]

Ben Gilbert 46:42 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 really willing to move to the US, and it was a very un-Japanese thing to do, to say, "I wanna do business in the US so bad that I will move my family-

David Rosenthal 46:57 Yeah

Ben Gilbert 46:57 ... and become a part of this culture to do that." That just wasn't done.

David Rosenthal 47:00 But it really sets up the business relations between Sony and US corporations and, and overall, like, the business environment in Japan and 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 American executives in Sony. At one point, one of them becomes the CEO of Sony-

Ben Gilbert 47:22 Yep

David Rosenthal 47:23 ... Howard Stringer. I don't think that happens in any other Japanese corporations.

Ben Gilbert 47:26 Both the American-Japanese bridge and 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 Akio Morita passes away many, many years later, in 1999, 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.

David Rosenthal 48:08 You wouldn't even say that about Steve Jobs.

Ben Gilbert 48:10 No. 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.

David Rosenthal 48:23 No, no, not at all. [chuckles] 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.

Ben Gilbert 48:33 Not Japanese, yes.

David Rosenthal 48:34 A non-Japanese business person. But yeah, like, you couldn't say that about anybody. Like, you can't say that about Elon Musk in America.

Ben Gilbert 48:41 He's the engine that pulled the Martian economy.

David Rosenthal 48:43 [chuckles]

David Rosenthal 48:43 Yeah, right, exactly. Okay, so let's fast-forward a little bit. So we got this Sony Corporation of America set up. Fast-forward to 1966. This-- I, I thought this was gonna be just, like, a total side note 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 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. So before the war, CBS had negotiated a merger with a record company in Japan to create an organization called Nippon Columbia, which was using the Columbia Records sort of label and doing distribution for Columbia Records artists and music in Japan. Yeah, side note, do you know why it was called Columbia?

Ben Gilbert 50:03 Because the C in CBS stands for Columbia?

David Rosenthal 50:06 Yes, yes! Second side note, to pull forward from later in the episode, did you know that Columbia Pictures is not the same Columbia?

Ben Gilbert 50:15 I did. I looked this up 'cause I wanted to bust this out for you and be like-

David Rosenthal 50:19 Ah!

Ben Gilbert 50:19 ... "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-

David Rosenthal 50:26 Yes

Ben Gilbert 50:26 ... "Wait a minute, these companies, Columbia Pictures and CBS, where the C stands from Columbia, chose the word Columbia completely independently-

David Rosenthal 50:37 Completely independently.

Ben Gilbert 50:37 And that is not true! They did not stem from the same company.

David Rosenthal 50:40 No.

Ben Gilbert 50:41 They are completely different.

David Rosenthal 50:42 [laughing]

Ben Gilbert 50:42 And yet Sony ended up buying both of them in their future.

David Rosenthal 50:45 I know.

Ben Gilbert 50:46 Unbelievable.

David Rosenthal 50:47 They didn't reunite the Columbias, they united the Columbias- [laughing]

Ben Gilbert 50:50 Yes

David Rosenthal 50:51 ... for the first time. [laughing] Okay, so back to 1966. CBS, newly reinterested in Japan, they're looking for a partner to set up a JV to access the Japanese recorded music market. Morita hears about this, and hears that a CBS executive named Harvey 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 wanna do a 50/50 JV between CBS and Sony. We'll be super flexible on whatever terms you want, and we will make this happen as fast as humanly possible." And Schein is like, "Okay," and they do. Morita is true to his word. Within a year, CBS/Sony Records is created. It's a 50/50 JV between the two companies, and it goes pretty well. In fact, 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 multiple sources have this. CBS/Sony Records, which is the Japanese distribution arm of CBS's recorded music in Japan, becomes such a cash cow that within just a few years, it is the most profitable division for both Sony and CBS.

Ben Gilbert 52:24 What?

David Rosenthal 52:24 It is just a geyser of cash. [chuckles]

Ben Gilbert 52:28 This is because of the pent-up demand for the Japanese public to buy American recorded records?

David Rosenthal 52:35 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.

Ben Gilbert 52:47 Hmm.

David Rosenthal 52:48 CBS Records around the world is signing all these artists and producing the music, and this is just distributing it in Japan, [chuckles] so it's all just incremental revenue. Anyway, this just blew my mind. Now, the other smart thing he does, which probably has a lot to do with CBS/Sony Records' success, is Morita puts his young protege in charge of running it in Japan, the young protege with a strong musical background. Do you know who that is?

Ben Gilbert 53:19 Ooh, I have no idea. Nope.

David Rosenthal 53:22 Norio Ohga, who would succeed-

Ben Gilbert 53:25 No way!

David Rosenthal 53:25 ... Morita-

Ben Gilbert 53:26 Yeah

David Rosenthal 53:26 ... as CEO of Sony. So Ohga, he was not a founder of Sony, but Ibuka, Morita, and Ohga were really the triumvirate for a long time.

Ben Gilbert 53:35 Hmm.

David Rosenthal 53:36 Ohga was a classically trained musician. He was an opera singer and a conductor. Even after he was CEO and chairman of Sony, he would still, like, conduct the Tokyo Philharmonic Orchestra. [chuckles]

Ben Gilbert 53:48 Oh, my God, that's wild.

David Rosenthal 53:49 Unreal. Uh, he was, like, a legitimate musician, and 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 musician's input on the quality of the products.

Ben Gilbert 54:03 Oh, that's so cool.

David Rosenthal 54:03 And that led to Morita saying like, "Hey, this guy is, like, incredibly talented at business and engineering and products, in addition to being a musician. We wanna bring him into the company."

Ben Gilbert 54:14 Oh, wow.

David Rosenthal 54:14 And the first major role he gets is running CBS/Sony Records, and then turns it into this geyser of cash flow. Like, literally, the stories about this are ridiculous. They were... 'Cause it's a JV, they both had to agree to do distributions, both Sony and 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 subsidiary. They start buying up, like, citrus groves in California to buy land, like, anything to just park the money coming [chuckles] out of this subsidiary.

Ben Gilbert 54:46 Okay, so they're getting into music in a big way.

David Rosenthal 54:48 Right around this time, too, we're now in the late '60s, early '70s, of course, television is becoming a huge thing. Television's been around forever, but color television is starting to be a thing.

Ben Gilbert 55:01 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.

David Rosenthal 55:08 ... I just assumed that like, oh, when color television came out, everybody started buying color TVs, and black and white TV, you know, went the way of, uh, VHS, [chuckles] which we'll get to in a minute, when DVDs came out. No, not the case. For many years, color TVs were on the market, but people kept buying black and white TVs 'cause the color TVs, the picture quality was so crappy.

Ben Gilbert 55:29 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 by having 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, 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.

David Rosenthal 56:18 Yep. 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 the Sony name and engineering culture. And the result of that is the Sony Trinitron, which is their electron gun system for creating a, a color picture on a screen.

Ben Gilbert 56:42 Which this was like a Ibuka thing.

David Rosenthal 56:44 Yes!

Ben Gilbert 56:45 He sort of, like, parachuted in and said, "I know I'm effectively the CTO of all of Sony, and we've got all these product lines." It's kind of 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. It'll eventually be called the Trinitron.

David Rosenthal 57:01 They put up the pirate flag.

Ben Gilbert 57:02 Yeah. We will figure out how to make a color TV that is mind-blowing to consumers and, you know, something that people wanna rush out and buy. Now, of course, the first run of those that w- that actually [chuckles] 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 worked to specification, and so the company lost [chuckles] 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."

David Rosenthal 57:34 Yeah, so the net 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 by market share, TV manufacturer in the world. Well, l- later in the episode, we'll come back to how that kind of became an albatross for them.

Ben Gilbert 57:55 Yeah. But, I mean, I remember growing up in the '90s, it was like there were Sony TVs, and there was everything else.

David Rosenthal 58:00 Exactly. And I had no idea what Trinitron- I was like, "Oh, Trinitron. It says Trinitron on there. I don't know what that means."

Ben Gilbert 58:05 Right, that was just s- some random Sony brand, the same way that Bravia is today or was recently. It's like, "Oh, marketing."

David Rosenthal 58:12 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. Morita and Ibuka get together, and they're like: You know, okay, we've now got this toehold 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 sort of run the reverse playbook that we did with audio or go back to our, you know, our, our DNA as a tape recorder business? What if we created a tape recording device that would work with our Trinitron TVs and would allow consumers to record video? That would be pretty awesome. I bet there'd be demand for that. [laughing] So they work super hard, Sony engineering teams do, for several years, and in 1975, they introduce-

Ben Gilbert 59:14 The greatest technology in its class by far-

David Rosenthal 59:17 ... To come out of this company in its illustrious, now almost three decades of existence, the Betamax [laughing] video recording technology. [laughing] This is so great. The story behind this is not at all what I thought. So it was really great technology. Now, on a feature basis, you could only record about an hour on Betamax.

Ben Gilbert 59:42 We might actually have some young listeners that don't know that word, David. So let me-

David Rosenthal 59:46 Ah!

Ben Gilbert 59:46 -just real quick say-

David Rosenthal 59:47 Yeah, set the context.

Ben Gilbert 59:48 Anyone who grew up with a VCR, that's the thing that the Betamax lost to.

David Rosenthal 59:53 Yes. VHS is the- was the competing format that they lost to, which we'll get to in a minute. But Betamax, yeah, for many listeners listening, like, it's, it's like the butt of a joke.

Ben Gilbert 1:00:04 You don't wanna be the next Betamax.

David Rosenthal 1:00:06 Exactly. So they introduced it in 1975, and the killer feature that they market for this, it's the first product to market of a video, uh, a video cassette recorder that consumers can use to record television programs. So they market the killer feature as time-shifting.

Ben Gilbert 1:00:25 It's kind of amazing that the first killer feature isn't, "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.

David Rosenthal 1:00:36 No, it's, it's... Yeah, literally, you do the recording, not-

Ben Gilbert 1:00:39 [laughing]

David Rosenthal 1:00:39 -you buy a, a movie that's pre-recorded. And so they run these great ads. First big, successful one is they have, uh, Bela Lugosi, who, uh, was the famous actor who played Dracula, and, uh, he's in character as Dracula in the ad, and he says, "When..." in a Transylvanian accent, which I won't do here, but he says, "When you work nights-

Ben Gilbert 1:00:58 [laughing]

David Rosenthal 1:00:58 -as I do, you miss a lot of great TV programs. And now, with the Sony Betamax and Trinitron" [laughing] Oh, it's so good. And so these commercials start going well. They start getting a bunch of sales, you know, uh, especially in the US, but all around the world of Betamax. Consumers are loving this. They got a hit product.... So they wanna keep going with this marketing theme. They reach out to MCA Universal to do a similar ad.

Ben Gilbert 1:01:28 Would've been Lou Wasserman running it?

David Rosenthal 1:01:30 Well, well, yes, it was Lou Wasserman and Sid Sheinberg. At that point in time, Universal, I forget which shows they were, but they had two of the top TV 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 Betamax, you can watch both of these shows that you'd normally have to pick."

Ben Gilbert 1:01:52 Ah.

David Rosenthal 1:01:52 So they start talking to Sid Sheinberg about this, and Sid's like [laughs] you know, Lou and Sid, as we talked about with Michael Ovitz, they are smart cookies, uh, and they were 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 to, like, our-

Ben Gilbert 1:02:15 Right

David Rosenthal 1:02:16 ... power to Holly-" 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."

Ben Gilbert 1:02:30 Huh.

David Rosenthal 1:02:30 So they respond to the, the request, reaching out to do a commercial with them, with like, "Hey, guys, we think this is copyright infringement-

Ben Gilbert 1:02:39 [laughs]

David Rosenthal 1:02:40 ... and we're gonna hit you with a lawsuit because you're stealing our content."

Ben Gilbert 1:02:43 Henceforth, there will be an FBI warning at the front of every video cassette.

David Rosenthal 1:02:48 This isn't even about buying movies from the video store that the studios are putting out.

Ben Gilbert 1:02:52 Right.

David Rosenthal 1:02:52 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.

Ben Gilbert 1:03:10 Wow!

David Rosenthal 1:03:11 So November of 1976, MCA files a lawsuit against Sony for enabling copyright infringement.

Ben Gilbert 1:03:19 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.

David Rosenthal 1:03:25 And this is a major news story. Harvey and Sid Sheinberg, [chuckles] they go on Walter Cronkite to debate this issue-

Ben Gilbert 1:03:35 What?

David Rosenthal 1:03:36 - of like, you know, is it okay for both the lawsuit, and is it okay for consumers to time shift?

Ben Gilbert 1:03:41 Ah, the lawyers would never let this happen in public now.

David Rosenthal 1:03:44 I know, I know. It's so, so great.

Ben Gilbert 1:03:46 Can you imagine if Tim Sweeney and Tim Cook went on a national television show together-

David Rosenthal 1:03:51 On Jimmy Fallon

Ben Gilbert 1:03:51 ... just to kind of have it out and figure out... Yeah. [laughs]

David Rosenthal 1:03:54 That would be amazing. So the irony of all this is that it's great for Betamax sales. Betamax sales go through the roof 'cause it's, A, it's free publicity and market education, [chuckles] and B, you know, at least American consumers are like, "Well, shoot, I better buy this before it goes off the market." [chuckles]

Ben Gilbert 1:04:14 Oh, right. I mean, uh, I went and downloaded Fortnite on all my iOS devices when [chuckles] I thought they were all gonna be removed.

David Rosenthal 1:04:22 Exactly, and so Morita is... He's pumped about this. He actually orders Harvey, the, you know, CEO of Sony America, to start a $20 million advertising campaign immediately [chuckles] in the US for Betamax, and Harvey declines, and, uh, doesn't go through with it, and that creates a big rift between them. Unfortunately, though, this was ultimately also the death of Betamax because I actually don't know what happened with the lawsuit. I imagine it was probably settled.

Ben Gilbert 1:04:52 I mean, at the end of the day, I, in the '90s, grew up recording television on my VHS, my, my, I think my Sony VHS cassette player, video, you know, VCR.

David Rosenthal 1:05:03 Yeah, of course, which they made.

Ben Gilbert 1:05:04 Yeah.

David Rosenthal 1:05:05 Well, how does this all happen? So other electronic manufacturers, even other electronic manufacturers in Japan, have been working on their own formats, and Lou and Sid at MCA are so pissed at 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. What do you want? Do you wanna 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. So MCA starts working with the VHS format, which was made by...

Ben Gilbert 1:05:50 Uh, oh, oh, it has to be-

David Rosenthal 1:05:52 Matsushita

Ben Gilbert 1:05:52 ... Matsushita. Yes!

David Rosenthal 1:05:52 Matsushita?

Ben Gilbert 1:05:53 Yes.

David Rosenthal 1:05:54 Matsushita Electric-

Ben Gilbert 1:05:54 Which, of course is-

David Rosenthal 1:05:55 Yes

Ben Gilbert 1:05:55 ... Panasonic?

David Rosenthal 1:05:57 Yes, Panasonic and JVC. They had a few brands. But then remember from our CAA episode-

Ben Gilbert 1:06:03 Wow, who ends up buying MCA Universal?

David Rosenthal 1:06:05 Who buys MCA? Matsushita.

Ben Gilbert 1:06:08 It's amazing that after building this relationship, that it then got so adversarial.

David Rosenthal 1:06:13 Yes.

Ben Gilbert 1:06:14 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, that MCA Universal had a preexisting relationship of collaboration with Matsushita.

David Rosenthal 1:06:32 Yeah, a super deep relationship.

Ben Gilbert 1:06:35 But suffice to say, I mean, this was enough to kill Betamax.

David Rosenthal 1:06:38 Yeah. Well, Lou and MCA had such clout in Hollywood at that point in time, I wonder if them essentially anointing VHS and Matsushita as the winners was enough to drag the whole industry.

Ben Gilbert 1:06:54 Okay, so Sony lost Betamax versus VHS. That seems [chuckles] very clear. That story is 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.

David Rosenthal 1:07:15 That's right. They did a ADR listing.

Ben Gilbert 1:07:18 So Sony's now tradable in Tokyo, in the stock exchange there, on the New York Stock Exchange in the US.... didn't go so well with the Betamax, but they've got a few other pretty awesome tricks up their sleeve.

David Rosenthal 1:07:29 Yeah. They've got essentially three bangers in the hopper here. [chuckles] The first one is the compact disc. So I did not realize that work on what would become the CD actually started, like, back in the '60s.

Ben Gilbert 1:07:46 Unbelievable.

David Rosenthal 1:07:47 And the origin of this was that Oga, who we've talked about, who would become CEO of Sony, he, in 1966, had negotiated a cross-licensing deal with Philips, 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 a digital audio format. I believe it was the early '70s when they started working on this.

Ben Gilbert 1:08:15 How crazy is it that we're telling the CD story, the origin of the CD format, before the Walkman?

David Rosenthal 1:08:20 Before the Walkman! I know, crazy. It takes many years for this technology to get to a point where it's productizable. I mean, it's crazy when you think about with all the tech that goes into CDs.

Ben Gilbert 1:08:35 Totally. I mean, the first of which being precision lasers, and David, what else spun out of Philips that involves precision lasers?

David Rosenthal 1:08:44 Ah, that would be ASML, right?

Ben Gilbert 1:08:46 Yep. So that... It's funny thinking about all the incredible innovation that we have today with small semiconductors made possible by something that traces its roots back to the same sort of laser innovations. But late '60s, research on a [chuckles] laser readable, writable disc.

David Rosenthal 1:09:05 Yeah, and it truly is Philips and Sony working together to create the CD format and lasers and all the technology going into it. I- It's not until 1980 that it's ready to be productized. So they announced the format in 1980, the CD format. They sign up tons of partners in all industries all over the world to license it. In 1982, Sony brings the first CD player to market, and then lots of other manufacturers follow suit, and the great thing is, Sony and Philips are getting royalties on all the hardware and all the discs being sold out there.

Ben Gilbert 1:09:39 Yeah, and let me say, when you say CD player, I think everyone's probably s- picturing something that looks like a Discman right now. Picture a VCR. Like, it's a big box that, yes, you put a CD in it and it plays, but it is a sizable machine.

David Rosenthal 1:09:54 So in just a few short years, by 1986, CDs become the dominant recording format by sales, passing records.

Ben Gilbert 1:10:03 Yeah, I'm actually looking right now at the RIAA 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, and I think there might have been, like, a handful of years in there in the mid to late '80s 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.

David Rosenthal 1:10:38 Interesting. Well, of course, Sony also does pretty well in the cassette industry with what you're referring to, [chuckles] the Walkman. Uh, and, and 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 honking, you know, home CD player on the road.

Ben Gilbert 1:11:03 No, CDs were not portable for a long time.

David Rosenthal 1:11:06 Yeah.

Ben Gilbert 1:11:07 So on the EA episode, where we interviewed Trip Hawkins, sort of 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 Morita's folly.

David Rosenthal 1:11:24 Yes.

Ben Gilbert 1:11:25 He single-handedly thought that, "Hey, 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 kind of can take it out in the world and record stuff and listen to it on the speakers. I think there's a market 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 attach headphones." And all of the marketing people at Sony are 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 in headphones." And you concurrently 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 Morita going, "No, it's gonna be low power because we're gonna make these amazing low-power headphones. We only need to produce a little bit of sound because it's gonna be right next to people's ears." This was a consumer behavior that did not exist in the world, that Akio Morita just said, "Everybody, trust me, let's invest in this," and, like, completely changed human history forever and the way that humans walk around out in the world.

David Rosenthal 1:12:43 Totally, and amazing that it was Morita who did... Like, this is the kind of stuff that Ibuka usually does.

Ben Gilbert 1:12:49 Yeah.

David Rosenthal 1:12:50 The sentiment on the board and in the company against Morita Morita 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 didn't sell by the end of the year, that he would resign from Sony.

Ben Gilbert 1:13:08 Whoa! I didn't realize that.

David Rosenthal 1:13:10 Yeah. Yeah, he had to sort of, like, literally lay his cards on the table.

Ben Gilbert 1:13:15 But it is one of these things, the way Morita phrases it in the book is this quote that is Steve Jobs before Steve Jobs, and I think I'm gonna make that point 11 times in this episode because-... It's not that Steve Jobs is a rip-off of Akio Morita, it's that he so badly wanted to be Akio Morita, and he was such a better marketer in his time of a lot of the concepts, that a lot of us grasp on to Steve's version of them, even though a lot of the concepts are actually Akio'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, 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 1986. 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 Moritaisms.

David Rosenthal 1:14:18 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.

Ben Gilbert 1:14:26 So John Sculley, 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 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 Sculley 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." And I think Sculley even met, right around this time, Sculley and Steve, with Akio Morita, and he says, "I remember Morita 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 Morita eventually passes away. Steve Jobs, in '99, is giving the Macworld keynote, and he starts the keynote by putting up a picture of Akio Morita, 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."

David Rosenthal 1:16:11 Notice he doesn't say the name of the first consumer VCR [laughing] there.

Ben Gilbert 1:16:15 [laughing] Right.

David Rosenthal 1:16:16 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 Morita in the Think Different campaign.

Ben Gilbert 1:16:25 Yep.

David Rosenthal 1:16:26 Which is interesting, 'cause they were quasi competitors?

Ben Gilbert 1:16:30 Had Sony come out with the VAIO yet at that point?

David Rosenthal 1:16:33 No, probably not.

Ben Gilbert 1:16:34 Yeah. 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.

David Rosenthal 1:16:44 Yeah.

Ben Gilbert 1:16:45 But the companies that he viewed having sort of no taste and no history, like going thermonuclear on Google, or like, uh, his relationship with Samsung, then all bets were off.

David Rosenthal 1:16:57 Microsoft, too.

Ben Gilbert 1:16:59 Yeah.

David Rosenthal 1:17:00 Yeah.

Ben Gilbert 1:17:00 Yeah.

David Rosenthal 1:17:01 So the first Walkman comes out in Japan in July of 1979. It sells through the 30,000 initial production run in one month, and then the next month it doubles, and then the next month it triples, and it continues tripling for month, after month, after month [chuckles] after that.

Ben Gilbert 1:17:23 Jake Sapir, on the LP Show, said he looked for triple, triple, double, double in the, the first four years of a startup.

David Rosenthal 1:17:29 Those were years, not months. [chuckles] Yeah.

Ben Gilbert 1:17:31 Right. [chuckles] This is double, triple, triple, triple, triple, triple months in a row.

David Rosenthal 1:17:35 Yeah. So this stat was fascinating to me, both for how big it is and how small it is. All in, Sony sells a quarter billion Walkmans in the life of the product.

Ben Gilbert 1:17:51 Wow, which is what? 1979 until 2000-ish?

David Rosenthal 1:17:55 Yeah. Call it that.

Ben Gilbert 1:17:57 Yeah.

David Rosenthal 1:17:57 So 20-ish years. I mean, that's both incredible ... Like, I don't, I don't know, but I c- I don't think there were any other, like, single products that sold a quarter billion units.

Ben Gilbert 1:18:07 I mean, the iPhone has.

David Rosenthal 1:18:08 No, no, at that point in time.

Ben Gilbert 1:18:09 Oh, at that point, yeah.

David Rosenthal 1:18:10 At that point in time. So, like, yes, it's so impressive on that front, but then, I don't know, today, a quarter billion units, that's like a, uh, it's like a year for Apple or something. [laughing]

Ben Gilbert 1:18:22 [chuckles] Yeah, it's crazy. I mean, there's just been so much consolidation to the point where, like, if you go buy 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.

David Rosenthal 1:18:37 Yep. So the Walkman, of course, eventually leads to the Discman, also becomes hugely popular. I had so many of those growing up, and Walkmans, too. Did you have Walkmans?

Ben Gilbert 1:18:50 I had one Walkman and one Discman, and both of them were that sort of like light Sony gray color-

David Rosenthal 1:18:56 Mm

Ben Gilbert 1:18:56 ... that, like, they- it was like that plastic that was designed to look like metal.

David Rosenthal 1:19:00 That was classic. Yeah, I had the colored versions, but-

Ben Gilbert 1:19:02 Like the yellow Discman that was, like, meant for running, that, like-

David Rosenthal 1:19:05 Mm, mm

Ben Gilbert 1:19:05 ... had the extra skip protection on it.

David Rosenthal 1:19:08 Extra skip protection. [laughing]

Ben Gilbert 1:19:09 [laughing]

David Rosenthal 1:19:09 Yes, yes. Uh, unfortunately, after the Discman, then they do the MiniDisc, and-

Ben Gilbert 1:19:15 Which I bought like a fool.

David Rosenthal 1:19:17 [chuckles] Me too. Me too.

Ben Gilbert 1:19:18 [laughing]

David Rosenthal 1:19:18 I loved Sony. How could you not love Sony?

Ben Gilbert 1:19:21 Oh, yeah.

David Rosenthal 1:19:22 Oh, and then fortunately, I didn't buy this. Did you buy the, um-... the Memory Stick digital audio players, the MagicGate Memory Stick?

Ben Gilbert 1:19:31 Fortunately not. I did have products that used that Sony thing that was a competitor to SD, the Memory, Memory Stick. They also had a thing that was a competitor on their cameras, CompactFlash.

David Rosenthal 1:19:45 Oh, that's right. That's right.

Ben Gilbert 1:19:47 And so I think the thing that I had that used the Memory Stick Duo was my PSP, my PlayStation Portable.

David Rosenthal 1:19:54 Oh, you had a PSP?

Ben Gilbert 1:19:55 I had a PSP-

David Rosenthal 1:19:56 Amazing

Ben Gilbert 1:19:56 ... 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.

David Rosenthal 1:20:08 Ah, and they were gonna sell, uh, movies on it, too, right, in addition to games?

Ben Gilbert 1:20:12 Yeah. I remember watching Mr. & Mrs. Smith on my PSP. I don't know if I bought the UMD or how it got on there, but [laughing]

David Rosenthal 1:20:21 That's amazing.

Ben Gilbert 1:20:23 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 8500 that I had at my desk and the G3 that my parents had on their desk, we had those two Apple products, and I think my dad had the first iPod, which plugged into our Sony stereo, but everything else was Sony. I had the Sony tape Walkman, the Discman, the MiniDisc player, a PS2, and the PSP, ah, many, many sets of Sony headphones. 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, di- some kind of DV, digital video format tape.

David Rosenthal 1:21:06 Yeah. Yep, we had one of those.

Ben Gilbert 1:21:09 Then, of course, a VCR, 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 was Sony. It was just like, well, if you were gonna go buy a piece of home electronics and it was gonna be good, you go buy Sony.

David Rosenthal 1:21:27 You go buy 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."

Ben Gilbert 1:21:34 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, 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 were just the best on the market.

David Rosenthal 1:21:57 Incredible. So the '80s were good for Sony-

Ben Gilbert 1:22:00 [laughing]

David Rosenthal 1:22:00 ... Big Max this time. For three reasons: one, CDs; two, the Walkman; three, life insurance.

Ben Gilbert 1:22:12 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?" David, what is Sony Life?

David Rosenthal 1:22:27 Sony Life is a life insurance company. They originally start in 1979 as a JV with Prudential, the Prudential life insurance company in the US.

Ben Gilbert 1:22:38 Mm-hmm.

David Rosenthal 1:22:38 Uh, supposedly, the reason this comes about is that in one of Morita's trips, pretty early, I think, trips through the US, he goes to Chicago, and he notices the Prudential building. And the Prudential building, it's a very, very impressive building on 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 Morita supposedly thinks to himself, "Okay, life insurance is a business I want to be in." [laughing] Uh, and so they create this JV.

Ben Gilbert 1:23:15 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. Now they're selling life insurance.

David Rosenthal 1:23:27 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 business is contributing, like, fifty percent-plus of their operating cash flow.

Ben Gilbert 1:23:49 I have a stat here. So as it grew, I think in 2001, it was, like, five percent of Sony's revenue. By 2014, its financial arm, which includes Sony Life and Sony Bank and a handful of other things, they have, like, a direct-to-consumer bank.

David Rosenthal 1:24:04 But I believe life is the big business.

Ben Gilbert 1:24:07 Yeah. In 2014, sixty-three percent of Sony's total operating profit was Sony Financial Group.

David Rosenthal 1:24:14 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.

Ben Gilbert 1:24:20 No, 'cause you go to the websites, and they're all in Japanese. Sony Bank came out in 2001 as a web-only consumer bank in Japan, so it's kind of the first neobank.

David Rosenthal 1:24:32 Yeah, that's right. Oh, man, there's this, like, alternate universe where Sony is Apple and Disney and, like, Berkshire Hathaway all in one. It's not even alternate, it happened.

Ben Gilbert 1:24:46 Yeah, but of course, times got a little tougher, uh, between then and now. But first, while we're on the note of insurance, David, I know there's a fantastic insurance company that you want to tell us about.

David Rosenthal 1:24:57 For our second sponsor of the episode and all of season 10, we would like to thank Vouch, the insurance of tech. Whether you're bootstrapped, seed stage, growth, public, or anywhere in between, with Vouch, you can go online and get next-day coverage in as little as ten minutes and grow your coverage as your company grows. Vouch is awesome. So as you heard on the Taylor Swift and Peloton episodes, rather than just telling you the same thing every time this season with Vouch, they had the awesome idea that we should use this time to do a little insurance 101 and dive deeper into what insurance is and how it works. So today-... We're gonna cover what actually happens when something goes wrong and you need insurance to step in. So the most frequent example of this in Vouch's coverage is employment claims. Say someone leaves your company, and then a couple months later, you receive a wrongful termination letter from an attorney that they've retained. There are basically two ways this could go. If you don't have insurance that covers this, you immediately start a massive fire drill. You try and understand what happened. You talk to all the parties involved. You probably lawyer up yourself. No matter what ends up happening with this allegation, it is guaranteed to cost you money, and frankly, more importantly, as a startup, time and emotional energy and focus dealing with all this. And if it ends up that your company did do something wrong, or at least in the eyes of your lawyers, they think a judge or a jury might think you did something wrong, you're probably looking at at least a six-figure settlement, if not a trial. And that is definitely not something that you want. That is being distracted from what makes the beer taste better for your company. So that's option one. Option two, you have specific coverage for this, insurance coverage from someone like Vouch. You contact Vouch, they step in, they work with you to resolve the situation. They take a lot of this off your plate, and they, of course, do this kind of stuff much more often than you, as any individual company or management team, ever would. So they have processes for these things. They can recommend- either recommend the right law firms to work with or work with folks that you already have. They can partner with you and help quarterback and resolve the whole matter, whether that means settling or litigating. And of course, because you're insured, this is what insurance is, they cover all the costs, the settlements, judgments, et cetera, up to the deductible on your limit. So basically, a quality insurer like Vouch can turn something from a gigantic, expensive, time, focus, energy-sucking problem into a "That was no big deal" kind of thing. As they like to say, "Insurance can help you learn some hard lessons the easy way." You can learn more at vouch.us/acquired, and all Acquired listeners, if you use that link, you will get an extra five percent off your coverages.

Ben Gilbert 1:27:54 Thanks, Vouch. All right, so David, Sony Financial Services, 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?

David Rosenthal 1:28:08 Well, there's a big up, and then there's a, a down, probably down to neutral in the long term. The big up is that, irony of ironies, in nineteen eighty-six, CBS gets a corporate raider who comes in and assumes a large stake in the company. One Larry Tisch buys a large stake in CBS, and there's this cash cow [chuckles] in the JV with Sony, and the records business as a whole is a nice business. Tisch 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 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: "Hey, Tisch 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?"

Ben Gilbert 1:29:19 And to this date, they're still, like, a Japanese distribution partner via this JV, and they're saying, "Come buy the whole freaking record label."

David Rosenthal 1:29:26 Yep. Now, at this point in the '80s, there are two things going on. One, Sony is massively ascendant. The CD is already really big at this point. Like, Sony is a worldwide, large, global brand, so it's not unreasonable to think Sony could buy all of CBS Records. The other thing happening in the '80s is that Japan's currency has massively, massively appreciated versus the dollar, and it is much easier for Japanese companies to go make acquisitions abroad than it would have been otherwise.

Ben Gilbert 1:30:00 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 '90s, 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... I don't know, it just feels, it's very inhumane.

David Rosenthal 1:30:31 Didn't you actually... Y- You sent me one that was, like, a Donald Trump interview from this time-

Ben Gilbert 1:30:36 I did, yes

David Rosenthal 1:30:36 ... where he's bashing Japan. Yeah. Great.

Ben Gilbert 1:30:38 Yes. Yep.

David Rosenthal 1:30:40 [sighs] It's the world we live in.

Ben Gilbert 1:30:42 So much changes, and yet so much stays the same.

David Rosenthal 1:30:45 So there's a bunch of back and forth and drama with Tisch and others. Tisch postpones the sale for a while, comes back. Basically, Morita is like: "We're good for any price. [chuckles] We w- we absolutely wanna 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 JV, so we can control the cash flow at corporate. We also think the overall record business is pretty good." 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. [chuckles] Uh, two billion dollars 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 '80s, when people thought that five X earnings was a crazy price to pay. [chuckles]

Ben Gilbert 1:31:49 Meanwhile, you and I were just texting the other day about a company that was four X earnings, and, uh, how excited we were to be doing a value investment in it. [chuckles]

David Rosenthal 1:31:59 Right. Tech value investing. This ends up being a pretty good buy for Sony. So as of recent years, Sony Music, the core of which is the CBS Records business, does over two billion dollars in operating cash flow every single year, and they've owned it for thirty years. So that was pretty, pretty good pickup.

Ben Gilbert 1:32:24 I mean, and Sony has a bunch of business lines now, so, you know, this stat almost isn't gonna 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, eleven, twelve percent of revenue of the whole company.

David Rosenthal 1:32:44 Yeah, this was a great deal. On the back of this, they are enticed to do another media content deal.

Ben Gilbert 1:32:52 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, 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 open this big question of not only focus, but are there synergies here? Because I think Morita and Ohga are pretty convinced that to 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 and ability to design more custom experiences using wholly owned content. And, like, I don't know that that ever actually became true.

David Rosenthal 1:33:53 Yeah, I think it certainly did not. So here's what's interesting in my perspective on these, 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.

Ben Gilbert 1:34:08 Yep.

David Rosenthal 1:34:08 I think you could argue, to the extent 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 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 1989 for three point two billion dollars, but that was the equity purchase price. Ultimately, when they assumed debt and a few other things, they spent about six billion dollars to buy Columbia Pictures. [chuckles] Everybody at the time, I think, knew that that truly was way more than the company was worth. Supposedly, the real driving factor behind it was Betamax, that Morita 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 be at the table against the Lew 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.

Ben Gilbert 1:35:34 It sounds good on paper, but I think what ended up 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, 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, and unless you can figure out some way to align incentives, you have a huge problem there.

David Rosenthal 1:36:24 Yep. Totally, totally agree. I think one other thing that is probably a bigger issue for Sony that crops up out of this is, you know, you mentioned hardware there. [chuckles] 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, but then they talk a lot about software, and it was weird to me reading this, as I'm reading about their software, and I'm like, "That doesn't sound like software as I think about it." Internally in So- at Sony at this time, they think of content as software. [chuckles]

Ben Gilbert 1:37:07 Hmm.

David Rosenthal 1:37:07 At least in what I was reading, and maybe this was different in, in Japanese, but they literally thought about, you know, the music business, the movie business, and eventually the gaming business as software [chuckles] that would go on their hardware. [chuckles]

Ben Gilbert 1:37:22 Which in some ways, it... I mean, gaming is definitely the most credible.

David Rosenthal 1:37:25 The closest, yeah. To my mind, this is where Sony, the seeds are sown for 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 [chuckles] were gonna take over people's lives.

Ben Gilbert 1:37:52 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. The company had an incredible run-up through the '90s, got hit hard in the dot-com bubble crash, or at least around that same time, and then has basically been a turnaround story since then. And it's fascinating that even though 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, I'm pretty convinced that the Sony Alpha 7C 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.

David Rosenthal 1:38:42 These cameras are incredible.

Ben Gilbert 1:38:43 But they are not fun to shoot with. You know, it's not like shooting with a Fuji. And the menu system on these Sonys, like, when you need to interact with the software on the devices, it is like, "Oh, my God!"

David Rosenthal 1:38:56 It is truly torture. [chuckles]

Ben Gilbert 1:38:58 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 and services that differentiate their hardware. They just make great hardware.

David Rosenthal 1:39:10 Yeah. And I think this point, you know, in the late '80s, early '90s, is where they set their strategy. And, and these were the last years of the, you know, the original triumvirate of, uh... So Morita has a stroke in 1993 that leaves him pretty incapacitated. Ibuka dies in 1997. Ohga starts phasing towards retirement in the late '90s. But yeah, during this time, they set their strategy as hardware, meaning consumer devices, and content, which they think of as software, and the marrying of those two things. And, you know, look, like, that's not wrong. [chuckles] Look at the tech companies today. Like, content and tech is a big thing that they all do, but Sony's just missing that true software element.

Ben Gilbert 1:39:56 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, they have played the arms dealer strategy in the streaming wars. Like, we h- fortunately, we have not seen Sony Plus. We are seeing Sony decide... I think 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 it. 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 HBO Max producing movies with DC IP, that is produced by WarnerMedia, that is owned by... Who's WarnerMedia owned by at this point?

David Rosenthal 1:40:55 AT&T?

Ben Gilbert 1:40:57 Yeah, that sounds right.

David Rosenthal 1:40:58 I can't keep them all straight.

Ben Gilbert 1:41:00 Yeah. Like, Sony's not playing that game, which I think is interesting.

David Rosenthal 1:41:04 Yep. And they also are where I thought you were going with this, they're playing the arms dealer role well with image sensors.

Ben Gilbert 1:41:12 Oh! Yeah.

David Rosenthal 1:41:13 But we have one more big story that we gotta tell on History and Facts before we move towards the present day here. And this, I'm so excited for this. This, of course, is the PlayStation story.

Ben Gilbert 1:41:26 I kind of forgot that there's another [chuckles] big story somehow. [chuckles]

David Rosenthal 1:41:30 [chuckles] Ben's like: "Jesus, [chuckles] you're not done yet?" I assumed that, like, everybody knew the PlayStation story.

Ben Gilbert 1:41:36 No, you were blowing my mind with every text that you sent me.

David Rosenthal 1:41:39 Oh, boy.

Ben Gilbert 1:41:40 And I had a PS2 and a PSP, and I did not know these things. All right, how did the PlayStation come to be?

David Rosenthal 1:41:47 So in 1989, at the end of the first golden decade for Sony, there is a senior engineer working at the company named Ken Kutaragi, 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, LCD displays, which are gonna be, you know, sort of part of the next generation of televisions and consumer devices. Ohga, Norio Ohga, loves him and, oh, thinks he's a rising star in the company. And Ken's daughter, around this time, they get her a Famicom, which, of course, is the Japanese name [chuckles] for the Nintendo Entertainment System, the NES, and she loves it. And he just observes her playing with this, and everybody at the time thinks video games and Nintendo systems are toys. And Ken kind of sees this, 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." Now, he's just an engineer at the 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, somehow he connects with Nintendo personally, and he hears that from Nintendo, that they are working on the successor system to the NES, the Nintendo Entertainment System, the Super Nintendo Entertainment System, the SNES. Classic, of course.

Ben Gilbert 1:43:34 Round the corners, make some purple buttons.

David Rosenthal 1:43:37 Oh, so great. Ken's really excited about this, 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 sound chip for the device."

Ben Gilbert 1:43:52 Oh.

David Rosenthal 1:43:53 An audio processor.

Ben Gilbert 1:43:54 'Cause all sounds in video games before were just, you know, doo, doo, doo, doo, doo.

David Rosenthal 1:44:00 Beeps and boops.

Ben Gilbert 1:44:01 Yeah.

David Rosenthal 1:44:02 Yeah, the Super Nintendo had super great audio, like, really good stuff.

Ben Gilbert 1:44:06 Huh.

David Rosenthal 1:44:07 And Ken and Sony designed that chip that made it possible.

Ben Gilbert 1:44:12 Ah.

David Rosenthal 1:44:12 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 pissed. [laughs]

Ben Gilbert 1:44:21 Whoa!

David Rosenthal 1:44:22 Ken totally went around protocol here and essentially did this component engineering work for Nintendo, this toy company, making this sound chip. Kutaragi nearly gets fired, but Ohga steps in and is like, "No, no, 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... The CEO steps in, allows the project to continue. They ship the chip. The Super Nintendo becomes a huge success. It sells just under 50 million units worldwide, which is enormous, like enormous for a- I mean, even for today, that is a very successful video game console. Ah, great new relationship for Sony. 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 data on them.

Ben Gilbert 1:45:37 Hmm.

David Rosenthal 1:45:38 And so game developers, especially developers who work with PCs and, you know, PC-based systems, they're lobbying Nintendo that they want to be able to develop on the CD format for Nintendo as well. Nintendo's like, "Oh, okay, well, we've got this relationship with Sony. [laughs] Let's work on a system together." This is amazing. They call up Ken. Ken's like, "Great, we can build an add-on 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. 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 that is a Super Nintendo, but also has the disk drive on it."

Ben Gilbert 1:46:30 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 a device that looks like a Nintendo, a Super Nintendo, kind of, but it says Sony PlayStation on it.

David Rosenthal 1:46:49 The Sony PlayStation- [laughs]

Ben Gilbert 1:46:53 [laughs]

David Rosenthal 1:46:53 ... that plays Super Nintendo games. [laughs] Oh, my gosh. So this is all done. They made this freaking product.

Ben Gilbert 1:47:01 Did they ship it?

David Rosenthal 1:47:03 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 1991, at CES... This is before E3, so CES was still the major video game industry conference. Sony announces the partnership, and they announce the Sony Nintendo PlayStation. They show it off. The next day, at the Nintendo keynote, Nintendo talks about how they've partnered with one of the original developers of the CD format, this great technology company with amazing history and legacy, to bring CD gaming to Nintendo for the first time, this secret partnership that they've been working on, that they have not announced to anybody until today: Philips.

Ben Gilbert 1:47:57 No way!

David Rosenthal 1:47:58 Yes. [laughs]

Ben Gilbert 1:48:00 What?

David Rosenthal 1:48:01 Yes.

Ben Gilbert 1:48:01 And they just kept Sony in the dark the whole time?

David Rosenthal 1:48:04 This is a huge thing in, I think, both gaming business history and, uh, like, Japanese business culture. Like, this is the ultimate betrayal. This is, like, literally Nintendo, like, shoving [laughs] like a machete in the back of Sony- [laughs]

Ben Gilbert 1:48:21 Whoa

David Rosenthal 1:48:22 ... and going with their original partner, Philips. Uh, totally secretive.

Ben Gilbert 1:48:26 So there was a CD add-on for the Super Nintendo that Philips made?

David Rosenthal 1:48:31 No, this never actually comes to fruition as intended. There is no add-on for the Super Nintendo that Philips makes.

Ben Gilbert 1:48:40 Whoa.

David Rosenthal 1:48:41 What does happen is Philips makes a- their own game console, called the CD-i, that comes out. Do you remember this? This is, like, a-

Ben Gilbert 1:48:48 Whoa, no

David Rosenthal 1:48:48 ... super obscure-

Ben Gilbert 1:48:50 So Nintendo did this to Sony the day after their announcement-

David Rosenthal 1:48:54 Yes

Ben Gilbert 1:48:54 ... only to not actually ship the thing with Philips?

David Rosenthal 1:48:56 Yeah, they don't actually ship the thing.

Ben Gilbert 1:48:57 Oh, my God.

David Rosenthal 1:48:57 Nintendo does make some games for the CD-i, so they have, like, this partnership, but it never goes anywhere, and [sighs] Nintendo, as great as they are, notoriously make questionable business decisions. [chuckles] Like sticking with cartridge for the N64 and all sorts of stuff. Now, in Nintendo's defense, the reason that they do this is that Sony was gonna retain licensing rights to 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 at a loss, and then they make all the money from the games.

Ben Gilbert 1:49:40 Licenses to the games.

David Rosenthal 1:49:42 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-

Ben Gilbert 1:49:48 They keep 100% of the money.

David Rosenthal 1:49:50 They get 100% of the money. 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, Bungie or whomever [chuckles] sell games on your system. Sony was gonna get that money, or most of that money, for the Nintendo disk stuff. So that's why Nintendo did this.

Ben Gilbert 1:50:11 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.

David Rosenthal 1:50:19 And I'm sure it was some split between Sony and Nintendo, but Sony was getting enough of that economics that Nintendo was unhappy. [chuckles]

Ben Gilbert 1:50:27 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."

David Rosenthal 1:50:35 But the way they did it- [laughing]

Ben Gilbert 1:50:37 [laughing]

David Rosenthal 1:50:37 Oh, my gosh. And so Nintendo, I think, thought that, like, "All right, well, Sony, you know, Sony's not gonna get into the games industry themselves. They can't do that. Like, they have no first-party studios. Nintendo can go make a new console. We'll put Mario Brothers on it, and 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, [laughing] ah, et cetera." So Sony has three options at this point, as Nintendo expects. They can completely give up. Two, they could go to Sega and try and partner with Sega, the Nintendo competitor at the time. They actually try to do that. Sega, in another boneheaded move, is like, "Yeah, no, we're not that interested." They were just, like, a much smaller company at that point.

Ben Gilbert 1:51:18 Mm-hmm.

David Rosenthal 1:51:19 And then the third option is to try... You know, they've done all this engineering work on making a console. And like, "Well, we could just try and do this ourselves." [chuckles] So the Sony board and the management team... [chuckles] You can tell I'm just, like, loving this.

Ben Gilbert 1:51:33 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.

David Rosenthal 1:51:38 I know. It's been a little while. The board and the management team, they vote to just abandon the gaming project. So yeah, like, basically-

Ben Gilbert 1:51:47 Really?

David Rosenthal 1:51:47 ... It's just like the Walkman. Like, everybody is against doing this, but Kutaragi is, like-

Ben Gilbert 1:51:54 Lobbying, yeah.

David Rosenthal 1:51:55 Questing within Sony to make this happen. And Ohga is like, "All right, I, I see that, like, you wanna do this. This could be big. It's not gonna work within Sony, the parent company." He transfers Kutaragi and the whole project to Sony Music, [chuckles] to CBS Records.

Ben Gilbert 1:52:20 And so was it within electronics before?

David Rosenthal 1:52:23 Yeah, it was within, like, the core-

Ben Gilbert 1:52:25 Wow!

David Rosenthal 1:52:25 ... electronics business, and he moves the whole, you know, division, essentially-

Ben Gilbert 1:52:30 Into music

David Rosenthal 1:52:31 ... over into music, just to, like, kind of protect it, so that, like, politically, they could actually do this-

Ben Gilbert 1:52:36 Wow

David Rosenthal 1:52:36 ... within the company.

Ben Gilbert 1:52:38 And let me just, like, for listeners who are like, "Does this end up being worth their while?" Not only [chuckles] is the video game industry this year a $180 billion industry, compared to Hollywood, which is $50 billion. 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 2021, they think that they will do, let's see, 2.9 trillion yen in their gaming segment, out of 9.9 total. So they think that, like, close to 30% of their revenue for all of Sony is going to come from gaming.

David Rosenthal 1:53:18 I mean, it's, I think, unquestionably the most valuable part of Sony these days.

Ben Gilbert 1:53:24 And from a profits perspective, I'm pretty sure it's close to 50%, at least last quarter.

David Rosenthal 1:53:29 Well, and this is the thing about the games business and the console business, as I was saying, you make all the money from selling games. And so the way the business works is you wanna get the largest 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 degree, just made such a huge tactical error 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 on console sales to play for the longer-term game of getting as much software sales as possible.

Ben Gilbert 1:54:14 I mean, it's, it's the ultimate venture capital bet, right? 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?

David Rosenthal 1:54:36 So the Super Nintendo, like I said, was this amazing success, hugely successful console, sells 50 million units in its life worldwide. The original PlayStation sells over 100 million units. [laughing]

Ben Gilbert 1:54:49 [laughing]

David Rosenthal 1:54:50 And they win over all the major third-party developers to come over.

Ben Gilbert 1:54:57 How do they do that?

David Rosenthal 1:54:58 There are a couple ways. It takes them a while. The early pitch is a few things. One, we're gonna use CDs as the medium, so you can, like, [chuckles] actually make the games that you want to, instead of being limited to the cartridge format.

Ben Gilbert 1:55:14 Hmm.

David Rosenthal 1:55:15 Two, and 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.

Ben Gilbert 1:55:28 Oh.

David Rosenthal 1:55:29 You couldn't just use PCs. You had to have, like... really invest in a big, like, chunk of hardware to-

Ben Gilbert 1:55:35 Hmm

David Rosenthal 1:55:36 ... 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, terrible to third-party devs.

Ben Gilbert 1:55:54 We have Mario, we have Zelda, like-

David Rosenthal 1:55:56 Yep

Ben Gilbert 1:55:57 ... we're the biggest and best studio on the Nintendo platform, so we kinda don't need you.

David Rosenthal 1:56:02 Whereas Sony came to all these third-party developers, and, and they were like, "We need you. [chuckles] We're gonna do everything we can to make you happy."

Ben Gilbert 1:56:09 Huh.

David Rosenthal 1:56:10 And then once the PlayStation started getting such a large install base, then it was just a no-brainer. It's like, "Oh, of course, I'm gonna either go exclusive on PlayStation or at least multi-platform on them, because otherwise I'm leaving out a massive part of the market."... so 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.

Ben Gilbert 1:56:29 Crash Bandicoot.

David Rosenthal 1:56:30 Final Fantasy VII, Resident Evil, Metal Gear Solid, Gran Turismo, blah, blah, blah, on and on and on. Amazing.

Ben Gilbert 1:56:37 Yep.

David Rosenthal 1:56:38 By the end of the system life, it gets eight thousand unique games, compared to the N64, 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. [chuckles]

Ben Gilbert 1:56:57 Wow!

David Rosenthal 1:56:58 So this is a massive hit, and then the PlayStation 2 becomes the most successful console of all time. Over a hundred and fifty million units sold worldwide.

Ben Gilbert 1:57:09 I mean, it's the only game console I've ever bought.

David Rosenthal 1:57:12 Wow, yeah. I was-- I'm surprised that you had one.

Ben Gilbert 1:57:14 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, [chuckles] I got to get a PS2.

David Rosenthal 1:57:24 Well, and the PS2, that was like... That was the peak of Sony's strategy.

Ben Gilbert 1:57:28 Yeah.

David Rosenthal 1:57:28 Like, that was that moment where it was actually working, like the DVD player being bundled in as part of it. Oh.

Ben Gilbert 1:57:34 I mean, that was a selling point. DVD players were kind of expensive, so we had one for, like, the main TV, 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 DVD player now 'cause this one comes with it.

David Rosenthal 1:57:46 Ah, smart.

Ben Gilbert 1:57:47 Whereas if we got... What was the next competitor? I guess the N64, no.

David Rosenthal 1:57:52 Uh, Sega Dreamcast, I think was the-

Ben Gilbert 1:57:54 And we were never gonna get a Dreamcast. I guess it would've been the original Xbox, but I'm not sure that would have been out yet.

David Rosenthal 1:58:00 Uh, yeah, that didn't come out for another year or two.

Ben Gilbert 1:58:02 When would this have been, like-

David Rosenthal 1:58:04 It was 2000. Year 2000 was when PS2 came out.

Ben Gilbert 1:58:07 Okay, so I, I guess Xbox would have been the other one that I could have gotten. But yeah, the, the PS2 was, like... I think a sufficient number of my friends had PlayStations, where I was, like, used to the, the controller, and then they all got PlayStation 2s, and then it became a no-brainer for me to get it, too.

David Rosenthal 1:58:24 Yep. And the other thing that the PS2 had was backwards compatibility-

Ben Gilbert 1:58:30 Yes

David Rosenthal 1:58:30 ... with the PS1, and that was a totally new concept in the industry. So, like, day one, the PS2, you had eight thousand games from the PS1 that you could play, and they did, like, a little bit of upscaling on them. Unfortunately, the PS3, [sighs] Sony got a little carried away.

Ben Gilbert 1:58:48 It took a while to get going, but ultimately did become a pretty successful system.

David Rosenthal 1:58:52 It did, but they really, really screwed it up. So, like, after the PS2, I mean, Sony was the video game industry. Like, Nintendo was relegated to a niche player, basically. Microsoft had come in with the Xbox, but the first Xbox, Sony, the PS2, just trounced it. The PS3 should have just run away with the market, but this is where Sony's not understanding computers really comes in.

Ben Gilbert 1:59:17 Huh.

David Rosenthal 1:59:18 The PS3, they'd made this whole thing. They had the Cell processor, was, like, the key to it. It had Blu-ray and the Cell processor.

Ben Gilbert 1:59:27 And the Blu-ray made the price tag kind of expensive.

David Rosenthal 1:59:30 Both of them did. Blu-ray was expensive, and they wanted to do the 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 HD DVD. And then, this Cell processor, they developed with, I think, Toshiba and IBM.

Ben Gilbert 1:59:48 Hmm.

David Rosenthal 1:59:48 And it was, like, its own unique architecture 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.

Ben Gilbert 2:00:09 Hmm.

David Rosenthal 2:00:10 And so it actually, like, opened the door for Xbox and 360 to bring a lot of 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 PS3 and the Xbox 360. But, like, they should have just totally walked away with it.

Ben Gilbert 2:00:31 And Microsoft has always struggled here because they sort of wanna use... Every time somebody wants to use something as a Trojan horse, it's like... It's kinda like when you're in the division series, and you're looking at the ALCS, and you-

David Rosenthal 2:00:44 Yes

Ben Gilbert 2:00:44 ... kinda forget that you still have a game to play.

David Rosenthal 2:00:46 Yes.

Ben Gilbert 2:00:47 Microsoft has always seen this as the path to the living room, and so until very recently, when I think their strategy has shifted pretty meaningfully, the thinking was always: Well, 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 DVD player anyway, and this thing can play games, so great." And then they can use that to cr- have a computer in the living room. 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, of, like, how this thing is really gonna make your life that much better by being the computing thing in the living room.

David Rosenthal 2:01:35 Yep, I think that is totally a fair characterization of Microsoft for many years. The irony is it's also Sony, right?

Ben Gilbert 2:01:41 Yeah.

David Rosenthal 2:01:42 At least with the PS3, like, they completely messed it up. Sony loses five billion dollars on the PS3 in the first three years.

Ben Gilbert 2:01:52 Wow!

David Rosenthal 2:01:53 It's bad, and, again, this is, like, coming off of the best-selling console of all time. Like, they had it won. [chuckles]

Ben Gilbert 2:01:59 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 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.

David Rosenthal 2:02:36 ... I don't think so either. I think it became a, a big albatross for them.

Ben Gilbert 2:02:40 So the early 2000s are, they're just getting beat up left and right.

David Rosenthal 2:02:43 Yeah. In 2006, they lose the number one market share lead in televisions for the first time.

Ben Gilbert 2:02:51 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, 300, 400 bucks, whatever it is, and they're gigantic.

David Rosenthal 2:03:02 They basically pay you to take them.

Ben Gilbert 2:03:04 Yeah, it's crazy. 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 whittled that away, and then that just fell like a rock after that.

David Rosenthal 2:03:14 Yep. And that Sony Bravia was... I mean, those things were, like, $5,000-

Ben Gilbert 2:03:18 Yeah, it was crazy

David Rosenthal 2:03:19 ... in 2002. So for eight straight years, in the mid-2000s, the television division, which was once, you know, one of the main crown jewels of Sony, ends up losing money, [chuckles] like bleeding cash for eight years.

Ben Gilbert 2:03:38 Didn't they spin it out? It was, like, so bad that they were like: We just gotta get this off our books.

David Rosenthal 2:03:42 Yeah, they end up restructuring it and basically get out of the business in 2011. Like, I think you can still buy Sony TVs, but there's a bunch of JVs.

Ben Gilbert 2:03:50 But it's, like, owned by private equity or something.

David Rosenthal 2:03:53 Uh, it's not a core part of the business anymore.

Ben Gilbert 2:03:55 Hmm.

David Rosenthal 2:03:56 The Blu-ray fight was totally a Pyrrhic victory. Like, they did ultimately win against HD DVD, which was a Toshiba format, but not worth it.

Ben Gilbert 2:04:06 Yeah. By the way, just to put some numbers around how royalties work, this, like, Blu-ray Disc Association earns about $7 for every Blu-ray player sold, and then I think there's maybe $2 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 per disc. And so, that gets cut up a bunch of ways, depending on who, you know, contributed R&D efforts originally. Uh, you know, so this consortium gets paid the, you know, $9 total per player, plus seven cents a, a disc. It takes a long, long time to be able to really recoup the costs, 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 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 part of selling each one. The other sort of reason they do it is Sony's whole reason for being is 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 enables 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, but I don't think that they ever look at the media licensing thing as, or the format licensing, as a meaningful revenue stream.

David Rosenthal 2:05:39 Well, whether they did or didn't, they fail on both fronts [chuckles] with Blu-ray. Like, there's no way that the Blu-ray consortium got their money back in terms of R&D and marketing efforts.

Ben Gilbert 2:05:50 Nope.

David Rosenthal 2:05:50 And Blu-ray players do not become a major consumer electronic staple.

Ben Gilbert 2:05:55 It is worth calling out, before we move on fully from PlayStation here, not being in gaming or paying a lot of attention, I don't think I understood Sony's dominance here relative to, to Microsoft. I always thought, like, the two of them come out with, 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 [chuckles] the PS2 as the best-selling of all time, then the PS4, then the original PlayStation. They also have four of the top six, because in the number six slot is the PS3, and the four and five slots are the Nintendo Wii and the Nintendo Switch. So Microsoft, by, uh, you know, consoles sold measurement, doesn't hold a candle to Sony's success in the console market.

David Rosenthal 2:06:39 But that's so far. [chuckles]

Ben Gilbert 2:06:41 Right.

David Rosenthal 2:06:41 It'll be interesting to see what happens going forward.

Ben Gilbert 2:06:44 Yep.

David Rosenthal 2:06:45 I don't know if it took the pandemic or just this current generation of consoles with the Series X and S Xboxes and the PS5, but I feel like these companies have finally woken up that, like, guys, video games is the largest [chuckles] medium by revenue out there, and they shouldn't be strategy devices to achieve other aims. [chuckles] Like, you should just focus on the business itself.

Ben Gilbert 2:07:11 Yeah, if you sum up all of music and all of Hollywood, and then multiply it by two, two and a half, then you get the video games market. It's ginormous [chuckles] .

David Rosenthal 2:07:22 Yeah.

Ben Gilbert 2:07:23 That wouldn't have been obvious even 10 years ago. It's 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: "Huh. Well, I bet we can make this a services revenue line." It's a very Tim Cook way of looking at it. 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.

David Rosenthal 2:08:04 It's like a Prime membership.

Ben Gilbert 2:08:05 Yes.

David Rosenthal 2:08:06 It's financially irresponsible as a gamer not to subscribe to Game Pass. [chuckles]

Ben Gilbert 2:08:11 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?

David Rosenthal 2:08:22 Game Pass itself is 15 bucks a month, and then if you get a console with it, you add on certain amount.

Ben Gilbert 2:08:29 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 18 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 $2 to $3 billion on Game Pass, and it's just such a completely different strategy than what Sony's doing.

David Rosenthal 2:08:54 It reminds me of what you-... pointed out on the Taylor Swift episode about Spotify, there are gamers out there who will buy ten, twenty games a year. They'll go pay sixty bucks for either a disc or download to buy the game.

Ben Gilbert 2:09:11 Mm-hmm.

David Rosenthal 2:09:12 I am not one of those gamers, [chuckles] 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, 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.

Ben Gilbert 2:09:38 Right. That's such a good point.

David Rosenthal 2:09:40 You know, Sony is interesting. So as of yet, Sony has not released a subscription service for games.

Ben Gilbert 2:09:48 Oh, yeah, but isn't there something, like, some thing that's supposed to come out in, like, late Q2 this year? Have you read about this?

David Rosenthal 2:09:55 I've not read anything specifically, but most people assume that they're working on one. But the interesting thing is that Sony has really doubled down on exclusivity on games.

Ben Gilbert 2:10:07 Mm.

David Rosenthal 2:10:08 So they have both in-house studios and then exclusive agreements with third parties of, like, if you wanna 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 PlayStation.

Ben Gilbert 2:10:25 Oh, interesting.

David Rosenthal 2:10:26 Which is different than Microsoft. You know, people are worried about with the Activision deal, about whether Microsoft would make Activision's games exclusive on Xbox. I don't think they will.

Ben Gilbert 2:10:37 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 most number of subscribers at the lowest churn rate, 'cause it's the best business model ever. And also, will they take your revenue if... Like, let's say this Activision Blizzard thing goes through, do they want your revenue i- if you go play that game elsewhere? Totally. 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-

David Rosenthal 2:11:13 Yep

Ben Gilbert 2:11:14 ... 'cause they have to sell you the game.

David Rosenthal 2:11:15 Yep.

Ben Gilbert 2:11:17 It's Project Spartacus, by the way, is the rumored-

David Rosenthal 2:11:20 Ah

Ben Gilbert 2:11:20 ... Game Pass alternative, which is kind of a mess, 'cause they already have the PlayStation Network, and then they have PlaySta- Like, there's all these different names for the ways that you can-

David Rosenthal 2:11:29 It's just 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. [chuckles]

Ben Gilbert 2:11:40 Yes. Well, what else haven't we discussed about Sony today? I think it's important to talk about the image sensor market.

David Rosenthal 2:11:47 Yes. Well, a couple things. We've briefly mentioned the VAIO PC division. That never works. They end up selling it in 2014. Uh, and then mobile and smartphones are just an unmitigated disaster for Sony. [chuckles]

Ben Gilbert 2:12:02 The whole Xperia thing was just a colossal failure. In fact, if you look back at the annual report, in 2018, 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. 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 break-even business for them. They, they generate a lot of revenue from it. They generate basically zero operating income, a little bit recently, but in 2018 in particular, they were showing, like, "Yeah, the... It would be profitable, but we lost a ton of money on our mobile communication segment." As I think more about, like, why did Sony fail so bad at PCs? Why did fa- Sony fail so bad at mobile? Why did they eventually lose TVs? I think Sony doesn't know how to make computers, and as things become computers, they lose.

David Rosenthal 2:13:12 I 100% agree with that.

Ben Gilbert 2:13:14 Phones became computers, computers matured to be the modern PC that we know today. You gotta worry about them against Microsoft if-

David Rosenthal 2:13:25 Yep

Ben Gilbert 2:13:26 ... Microsoft's 20-year vision of the computer in your living room actually becomes a meaningfully 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.

David Rosenthal 2:13:40 Oh, yeah, but I think, like we were just talking about with, um, Game Pass, I think Microsoft has, uh, finally abandoned that computer-in-your-living-room vision for Xbox and realized, like, "No, no, no. This is a good business. We're just gonna make this a good business." [chuckles]

Ben Gilbert 2:13:55 Yeah, that's true. That's very true.

David Rosenthal 2:13:57 But I think you're spot on that Sony didn't see and wasn't equipped for a world where a computer became your phone, and a computer became your content consumption dev- your TV. You know, your, your phone became your [chuckles] TV.

Ben Gilbert 2:14:14 Yeah.

David Rosenthal 2:14:15 And I think instead, they thought the world was gonna be that your living room device became your computer, and that's what the PS2, and then really the PS3, was all about, and the Cell Processor, et cetera, and that just never [chuckles] happened.

Ben Gilbert 2:14:32 Yeah.

David Rosenthal 2:14:32 One of the things that if you look at bare 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. [chuckles] They're like, "No, no, no. You are not gonna do that as well as Tesla."

Ben Gilbert 2:14:53 It's a bad sign for the company that they announced that. It's kinda like how when I saw Wonder Woman '84, 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 seriously doubt every decision that the creative leadership at Warner's does. So it's kind of the same thing with Sony, where I'm like, "Yikes!"

David Rosenthal 2:15:19 Yeah, you should not be making a car right now. [chuckles]

Ben Gilbert 2:15:21 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.

David Rosenthal 2:15:31 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.

Ben Gilbert 2:15:40 That's an amazing story. So continuing their arms dealer strategy, I think as they realized 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 PowerShot line. This was really beneficial for all of their pro-end cameras. They kind of invented the mirrorless segment. I mean, the Sony Alpha, I hate this word, but it's so applicable here, the prosumer 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 on how to get the smallest, most effective image sensor. And they, I think, are now the sole supplier to the iPhone 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 when you think back to, I think the announcement was the iPhone 4, but you know when cell phone cameras turned from camera phones to like, "Whoa, these are actually becoming pretty good cameras"?" 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 came from, I think, two thousand and nine. 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 14 and 15 that are, like, totally unbelievable-

David Rosenthal 2:17:40 Mm.

Ben Gilbert 2:17:40 -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.

David Rosenthal 2:17:55 That's such a good success story, right, of like, making kind of back to the original Sony. Like, here's something that people want, that is like, this is gonna work in the market, [chuckles] and then you learn and grow from that.

Ben Gilbert 2:18:08 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, 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 them content.

David Rosenthal 2:18:32 Sony's just kinda like, it's this collection of all these vignettes, you know-

Ben Gilbert 2:18:37 Oh, yeah

David Rosenthal 2:18:37 ... that stitched together into Sony. It's not quite a linear narrative in the same way as a lot of other companies we cover.

Ben Gilbert 2:18:44 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.

David Rosenthal 2:19:07 Definitely a lot of stuff. [laughing] Okay, so all the stuff, where does this leave us?

Ben Gilbert 2:19:12 Yes, today.

David Rosenthal 2:19:12 What's the picture of Sony today?

Ben Gilbert 2:19:14 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.

David Rosenthal 2:19:27 Electronics are consumer electronic devices?

Ben Gilbert 2:19:30 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. But when you look over at their operating income, games, also thirty percent-ish, they 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. That, in the past, was zero.

David Rosenthal 2:20:00 Or negative, right?

Ben Gilbert 2:20:01 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 'cause it's super diversified, but 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 in, is enormously profitable and is, like, half of their profits." And that's just, like, not really the case anymore.

David Rosenthal 2:20:42 Maybe that's actually the best way to have business insurance. Besides Vouch, [laughing] 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.

Ben Gilbert 2:20:54 Yep, it's quite the hedge. 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.

David Rosenthal 2:21:12 ... Hmm, what a collection of stuff! [chuckles]

Ben Gilbert 2:21:15 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.

David Rosenthal 2:21:26 Yeah.

Ben Gilbert 2:21:27 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. 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, 10-ish percent is selling hardware. And in the same way that Microsoft has reoriented their business model around, we gotta keep selling people who like Xboxes 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 wanna take you down. So this year, Sony will do about $86 billion in revenue.

David Rosenthal 2:22:22 Okay.

Ben Gilbert 2:22:22 Remember that number, $86 billion. Writing it down here. Over the last, let's see, 22 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?

David Rosenthal 2:22:42 Ooh! I don't.

Ben Gilbert 2:22:45 That seven and a half billion would be the box office gross receipts for the Spider-Man franchise.

David Rosenthal 2:22:52 Ah, [laughing] yes.

Ben Gilbert 2:22:55 [laughing] Not even including home video, not even including, you know, other, other licensing things around that. 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 Disney, and... I mean, uh, there's been close to 10 episodes dedicated to that world. And so while we were doing the Sony story, I thought, "We gotta link it in somehow."

David Rosenthal 2:23:26 Yes. All right, what's going on? Why does Sony have Spider-Man?

Ben Gilbert 2:23:29 [chuckles] 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. 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. So [chuckles] starting around 2000, Sony approaches Marvel and says: "We'd like to pay you $10 million for the film rights to Spider-Man." Now, Marvel had never done... 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 Studios, you know, nothing of that. So they look at this, and they're like-

David Rosenthal 2:24:18 Free money.

Ben Gilbert 2:24:19 "Okay, free money. We'll get $10 million, that's great." I think they also were gonna get 5% 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 Marvel Studios, absent the gigantic success of the Tobey Maguire Spider-Man. But David, $10 million and 5% of the revenue is what Marvel gets out of this. 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.

David Rosenthal 2:25:06 [laughing]

Ben Gilbert 2:25:07 Sony has the right to produce Spider-Man movies forever.

David Rosenthal 2:25:12 Forever?

Ben Gilbert 2:25:14 Yes, in perpetuity, as long as they release one every five years and nine months. [laughing]

David Rosenthal 2:25:20 [chuckles] So we can guarantee-

Ben Gilbert 2:25:22 [laughing]

David Rosenthal 2:25:22 ... that there is gonna be one Spider-Man movie at least every five years and nine months, forever.

Ben Gilbert 2:25:28 Yes, forever. And so this is why we got those weird Andrew Garfield movies right after the three Tobey Maguire ones-

David Rosenthal 2:25:36 Oh, yes

Ben Gilbert 2:25:36 ... where they told the same story again, and you were like-

David Rosenthal 2:25:39 Yeah, the... I, like, I never even bothered with those.

Ben Gilbert 2:25:41 [chuckles]

David Rosenthal 2:25:41 I was like, "Why is this happening?"

Ben Gilbert 2:25:43 Right. They had to produce and release them in order to retain the rights.

David Rosenthal 2:25:47 Oh, my God.

Ben Gilbert 2:25:48 And so you might say, like, "Okay, well, how's it work now?" Because we've got a new Spider-Man, who, you know, is the same in the Spider-Man movies and in the Marvel movies. Like, somehow he's back in the Marvel Cinematic Universe. So what happened there? Well, obviously, Marvel really wants to have Spider-Man included in the Avengers. And they also decide that, "Well, uh, 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."

David Rosenthal 2:26:30 [chuckles] They're not like Sony Pictures.

Ben Gilbert 2:26:33 [laughing] Right. They cut a second 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. 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 5%, but we're gonna basically make the movies, and in return, you have to let us put that Spider-Man into the MCU."

David Rosenthal 2:27:08 Wow!

Ben Gilbert 2:27:10 And so they cut that deal right before Captain America: Civil War, which is where they introduced Spider-Man. So all these recent Spider-Man's, No Way Home, and... It's actually this weird joint ownership, where Sony's making the money, but Marvel's making the movie, and they're just doing it in order to, like-... get to use Spider-Man in the MCU. And on top of all of this, you might say, like, "Wait, how does this work?" Because some of them Spider-Man movies are 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. Sony gets to license out the movie wherever they please. If Spider-Man is not the main character, it is a Marvel movie, and it's just all the same normal stuff that Marvel always owns.

David Rosenthal 2:28:06 Wow! [laughing] I'm so glad you researched that. That is so fun.

Ben Gilbert 2:28:13 It's wild. And if you look at the performance of Spider-Man: No Way Home, the one that just came out, that already grossed worldwide one point seven billion in revenue. Remember, Sony is keeping ninety-five percent of that. The costs are high. You know, these movies cost hundreds of millions to make now, but Sony Pictures itself only made ten point two billion this year. So one point one, two... I don't know what the-- and there is a big marketing budget, but, like, 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.

David Rosenthal 2:28:49 So Marvel now has an incentive to make the cost of the movies as high as possible, right?

Ben Gilbert 2:28:56 It's a good question. I don't-

David Rosenthal 2:28:58 Yeah.

Ben Gilbert 2:28:58 I assume there's a lot more-

David Rosenthal 2:28:59 There must be

Ben Gilbert 2:29:00 ... 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. 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 really important IP and actually created successful product out of it.

David Rosenthal 2:29:32 That is so cool, and the, the movies have been incredibly successful, right?

Ben Gilbert 2:29:35 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 3 font was the same, like, on-- that was printed on the outside as the Spider-Man Tobey Maguire series?

David Rosenthal 2:30:03 Now it makes sense why the Spider-Man games are PlayStation exclusives. I always wondered that. I was like: What? Why is this not on Xbox?

Ben Gilbert 2:30:12 Pretty crazy. There's even something more nutty, like, for another ten million, 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. Like, no one really cared about Iron Man. They sort of, like, invented the MCU out of, you know, second-tier characters. And [chuckles] so Sony was like: "Uh, no, let's just go get Spider-Man.

David Rosenthal 2:30:40 Oh, my gosh!

Ben Gilbert 2:30:40 Let's do that. [laughing]

David Rosenthal 2:30:42 This is like a Confederacy of Dunces here. Like, who is more stupid than the other? [chuckles]

Ben Gilbert 2:30:47 Totally. But it just goes to show you can't forecast these things. You don't know.

David Rosenthal 2:30:51 You don't know.

Ben Gilbert 2:30:52 All right, let's do bear and bull, and we'll do some powers.

David Rosenthal 2:30:57 Give me, give me your bull case on Sony.

Ben Gilbert 2:30:59 All right, bull case. 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. 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.

David Rosenthal 2:31:30 Yep.

Ben Gilbert 2:31:31 There's something interesting about 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-

David Rosenthal 2:31:42 Right

Ben Gilbert 2:31:42 ... attraction as an investment. So I don't know. At 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, 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.

David Rosenthal 2:32:15 Mm.

Ben Gilbert 2:32:15 Like, I was going into it thinking, Taylor Swift is showing us that artists are gonna go direct, and I kinda came out of it saying: Unless you're Taylor Swift, it seems like record labels are gonna continue making a lot of money.

David Rosenthal 2:32:26 Yep.

Ben Gilbert 2:32:27 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. It really is a turnaround story, and I haven't looked... I think the stock price is near where it was w- at their all-time high twenty-plus years ago, so the, the turnaround of, uh, undoing all the damage, uh, in, in the late '90s and early 2000s is almost complete.

David Rosenthal 2:32:58 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. [chuckles]

Ben Gilbert 2:33:08 Right, yeah. It's interesting that it was in the dot-com era, but, uh, was a completely different set of mismanagement activities.

David Rosenthal 2:33:16 Yep. Okay, so that's the bull case. What's the bear case?

Ben Gilbert 2:33:20 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, 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 bear case, is that 30% of both revenue and profit right now come from gaming for Sony, and that's at risk.

David Rosenthal 2:33:57 Is there any risk to the image sensing business that Apple, in particular, in-houses this at some point?

Ben Gilbert 2:34:04 Maybe, but I think the, like, super specialized CMOS sensing stuff is pretty different than 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 20-year bet to make, they're happy to keep, you know, continue letting it play out as is.

David Rosenthal 2:34:27 Sourcing.

Ben Gilbert 2:34:28 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.

David Rosenthal 2:34:37 Cool.

Ben Gilbert 2:34:38 The other bear case is, like, Sony is fully out of the business that they used to be in, where you go buy a bunch of Sony gadgets and put them around your house. Now they're, they're like: "We sell you a gaming system, and then we sell specialized stuff, or we're an OEM." 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 i- a little sad to watch the original Sony kind of be done, other than maybe their camera line is probably the closest thing to what they were originally.

David Rosenthal 2:35:14 It's just kind of hard to get, like, super excited about anything 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, also incredibly impressive, but they're a component now. Like, [chuckles] what would Ibuka and Morita be thinking about the current state of the company?

Ben Gilbert 2:35:42 I bet Ibuka would be excited about the PSVR 2.

David Rosenthal 2:35:45 Yeah.

Ben Gilbert 2:35:46 I think right now, this current generation, the Oculus Quest 2, is like... It's much newer than the PSVR, but I think it's, like, massively outselling it, and so if you were gonna get excited about something, I would think it would be a, dare I say, a metaverse bet on them producing a good 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.

David Rosenthal 2:36:17 That's a good point, and with, you know, sentiment about, uh, Meta and, uh, Oculus, yeah, there's a re- there's a real opportunity for Sony there.

Ben Gilbert 2:36:28 Yeah. That said, I think Meta is investing just gobs and gobs of money and talent and everything into the next five versions of the M- you know, Meta Quest 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 Apple's.

David Rosenthal 2:36:51 It'll be interesting to watch that play out. Like, I, [sighs] 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, I just have a hard time about having a Facebook device with a camera in my house all the time. [chuckles]

Ben Gilbert 2:37:12 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 the Meta Quest 5 or whatever is gonna be the real consumer hit from any ickiness that people feel about what was once called Facebook.

David Rosenthal 2:37:26 Yep.

Ben Gilbert 2:37:27 Okay, let's talk about power. 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, does the conglomerate itself have an overarching power, where it actually effectively leverages the ownership of multiple business to help those businesses versus competitors?

David Rosenthal 2:37:52 I would say today, the answer is no. I do think in the past there was a brand power-

Ben Gilbert 2:37:59 Oh, yes

David Rosenthal 2:38:00 ... that went across much of the conglomerate. Maybe not all of it.

Ben Gilbert 2:38:05 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 1983, 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 piece was written 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, uh, writing that article says: "It's over for Sony. The company's best days are behind it."

David Rosenthal 2:38:43 Hmm.

Ben Gilbert 2:38:43 And the stock would go up a lot after 1983, 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, was kind of going away.

David Rosenthal 2:39:02 Yep.

Ben Gilbert 2:39:03 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 today, where you're like: "Oh, my gosh, this segment totally has this power"?

David Rosenthal 2:39:21 Well, it's interesting you say today. I do think the PlayStation story-... is an incredible story of network economies in the developers and the consumers of a, of a two-sided network economy, where the more install base PlayStation got, the more attractive the platform came to developers, 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, like, I anecdotally felt this as a consumer at the time, but like eight thousand games on the PlayStation [chuckles] versus four hundred on the N64, and I had both systems, and I loved 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, 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 the gravity was so much with that platform that Squaresoft and Capcom and Konami and Act- like they had to come to the PlayStation.

Ben Gilbert 2:40:40 I think that's a good point. It's funny, as I look down, I-- 'cause the question is: Why are each of these businesses able to have outsized profits versus competitors? And if I look at going down the list today, music, 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. Hmm, 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, more profitable than the other ones, or they have a real edge the way that Disney does with all their in-house IP.

David Rosenthal 2:41:17 Except for the Spider-Man deal.

Ben Gilbert 2:41:19 Yes. [chuckles]

David Rosenthal 2:41:19 That's a coordinated resource.

Ben Gilbert 2:41:21 I think they're largely competing in the marketplace with pictures. Uh, with electronics, products, and solutions, I kind of feel the same way. 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. Like, I think if the Sony camera was twice as expensive as a comparably good, you know, Canon, I definitely would get the Canon. Uh, 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. 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 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-

David Rosenthal 2:42:38 It's interesting, though, like, with Game Pass, and if the, if the industry moves much more to subscription dynamics, I do think a lot of this power goes away. Switching costs become a lot lower. Network economies become a lot less powerful.

Ben Gilbert 2:42:56 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, 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."

David Rosenthal 2:43:17 No, the only one that jumps out, you know, from the story and the history is the previous incredible power of the brand.

Ben Gilbert 2:43:25 Yep. Well, before we move toward grading here, and I think instead of value creation, value capture today, I want to 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: the day that Sony started, the heyday of the early '90s, and today. What does Made in Japan mean?

David Rosenthal 2:43:56 Ooh.

Ben Gilbert 2:43:57 'Cause famously, Akio Morita's goal with Sony was to transform Made in Japan on a product from, "Oh, this is of low quality," 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 '90s.

David Rosenthal 2:44:16 Yep.

Ben Gilbert 2:44:17 And I think when I was buying a lot of Japanese electronics in the '90s, 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 Morita and, and friends. 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, 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. And I don't think that I would say my brand perception of something that is Made in Japan is any lower than I would have thought in Sony's heyday, but it hasn't continued its ascendancy.

David Rosenthal 2:45:24 It's interesting. That- that's what I was struggling with when you asked the question is: How do I feel today? I one hundred percent agree when Sony was started-... made in Japan for most people in the West probably meant low quality, signified low quality, and then by Sony's heyday, it signified high quality. The interesting thing about today, 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, 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, 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.

Ben Gilbert 2:46:34 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.

David Rosenthal 2:46:58 Yeah.

Ben Gilbert 2:46:58 Like, that era is kind of past us.

David Rosenthal 2:47:00 It's kind of past. Yeah, exactly.

Ben Gilbert 2:47:02 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.

David Rosenthal 2:47:22 Exactly what you said. It used to mean a lot where something was made, and I think it just means a lot less now.

Ben Gilbert 2:47:29 That's a good point. Actually, yeah, so this answer is a two-axis thing, where it's like, well, it went from meaning something was low quality to high quality, and then the magnitude of how much it mattered just went away. And now for the final sponsor of our episode, we want to tell you about our good friends at SoftBank, the SoftBank Latin America Fund. Now, as you know from previous episodes this season, SoftBank created this fund with a very simple thesis. The region is absolutely overflowing with innovative founders and great opportunities, but as we all know, has been historically short on capital. And as Shu and Paolo have told you on previous episodes, one of the big lessons they learned while investing eight billion dollars in over seventy countries is LatAm is much more about inclusion than it is just disruption. Because the vast majority of the population is underserved in almost every single category, from banking to transportation to e-commerce, and similarly, businesses, wildly underserved by modern software solutions. There is just so much to be built for businesses and people all across LatAm. A phenomenal example is portfolio company, VTEX, a collaborative commerce platform. So VTEX is crazy. They saw more than ninety-eight percent growth during the pandemic as companies turned to it for digital commerce, their native marketplace, and order management capabilities. Today, VTEX powers over three thousand online storefronts for global brands like Walmart, Coca-Cola, Nestle, and wait for it, David, Sony [chuckles]

David Rosenthal 2:49:04 What? No, come on!

Ben Gilbert 2:49:06 Yes.

David Rosenthal 2:49:06 You made that up.

Ben Gilbert 2:49:07 No, I did not.

David Rosenthal 2:49:07 That's not true.

Ben Gilbert 2:49:08 I did not.

David Rosenthal 2:49:08 Wow. [chuckles]

Ben Gilbert 2:49:08 That is what, in what they sent me, uh, and they didn't even know Sony was gonna be this episode, so-

David Rosenthal 2:49:12 They had no idea.

Ben Gilbert 2:49:14 Says a lot.

David Rosenthal 2:49:14 That's awesome.

Ben Gilbert 2:49:16 Yeah.

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David Rosenthal 2:49:57 It's so great what they're doing there. I mean, what a, A, a massive opportunity, and they really were the first to come in in a big way and to play eight billion dollars of capital into this opportunity. Like, it's such a great story.

Ben Gilbert 2:50:12 Okay, so grading, 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. They both had pretty thin net income margins of around two or three percent, so neither was really making a lot of money. Sony's obviously one of them. Sony grew to an impressive market cap of a hundred and fifty billion dollars, and, uh, that's about where they sit today. And they grew that piddly net income margin to, uh, thirteen percent today, so they're generating income. Now, unfortunately for our comparison, the company that started right at that same starting line as them is Apple.

David Rosenthal 2:51:00 I figured.

Ben Gilbert 2:51:01 So Apple is now worth 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, 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. Apple's was the greatest in history. [chuckles]

David Rosenthal 2:51:37 ... Yes. [sighs] Thank you, as always, to Berkshire Hathaway for keeping me invested in Apple. [laughing]

Ben Gilbert 2:51:46 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,