SONY (75 years of electronics history in 3 hours)

1. 0:00 – 7:15

   Why Sony matters: the company Steve Jobs modeled Apple after

   1. DRDavid Rosenthal0:00

      [chuckles] We keep biting off a lot in these episodes. [chuckles]

   2. BGBen Gilbert0:03

      I mean, you're telling the history of modern Japan.

   3. DRDavid Rosenthal0:04

      We need to do a, like, two-year-old company. We need another FTX soon. [chuckles]

   4. BGBen Gilbert0:08

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

   5. DRDavid Rosenthal0:14

      Yeah. [chuckles] Exactly.

   6. SPSpeaker0:15

      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?

   7. BGBen Gilbert0:32

      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.

   8. DRDavid Rosenthal0:47

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

   9. BGBen Gilbert0:52

      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.

   10. DRDavid Rosenthal1:03

       Literally modeled himself after. [chuckles]

   11. BGBen Gilbert1:06

       [chuckles]

   12. DRDavid Rosenthal1:06

       You know the story, right, of the black turtlenecks and the Sony connection?

   13. BGBen Gilbert1:10

       Enlighten us.

   14. DRDavid Rosenthal1:11

       [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]

   15. BGBen Gilbert1:36

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

   16. DRDavid Rosenthal1:41

       [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.

   17. BGBen Gilbert1:57

       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.

   18. DRDavid Rosenthal2:17

       As well as Sony headphones right now, right?

   19. BGBen Gilbert2:19

       That's right.

   20. DRDavid Rosenthal2:19

       Yeah.

   21. BGBen Gilbert2:20

       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?

   22. DRDavid Rosenthal2:35

       [chuckles] I did know that.

   23. BGBen Gilbert2:37

       [chuckles]

   24. DRDavid Rosenthal2:37

       Do they still make that thing?

   25. BGBen Gilbert2:39

       Yeah, they do.

   26. DRDavid Rosenthal2:40

       You might say it's the Tesla bot of old, the precursor.

   27. BGBen Gilbert2:43

       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?

   28. SPSpeaker3:49

       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.

   29. BGBen Gilbert6:05

       ... 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.

   30. DRDavid Rosenthal6:22

       Such a great company story, Vanta.
2. 7:15 – 21:27

   Postwar Japan and the two founders: Morita (business) meets Ibuka (engineering)

   1. DRDavid Rosenthal7:15

      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-

   2. BGBen Gilbert7:36

      Hmm.

   3. DRDavid Rosenthal7:36

      -if you've ever been there, I believe.

   4. BGBen Gilbert7:38

      I haven't. I've never been to Japan.

   5. DRDavid Rosenthal7:40

      No way! Oh, you gotta go. We should do an Acquired trek.

   6. BGBen Gilbert7:42

      We totally should.

   7. DRDavid Rosenthal7:43

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

   8. BGBen Gilbert7:50

      Oh, nice.

   9. DRDavid Rosenthal7:51

      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.

   10. BGBen Gilbert9:05

       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."

   11. DRDavid Rosenthal9:40

       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.

   12. BGBen Gilbert10:04

       [chuckles]

   13. DRDavid Rosenthal10:04

       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.

   14. BGBen Gilbert10:13

       Yep.

   15. DRDavid Rosenthal10:14

       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]

   16. BGBen Gilbert10:43

       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.

   17. DRDavid Rosenthal11:01

       You might say that Ibuka is like the Woz, and Akio Morita is like the Jobs.

   18. BGBen Gilbert11:08

       That's a great comparison. Yes-

   19. DRDavid Rosenthal11:10

       So-

   20. BGBen Gilbert11:10

       You might

   21. DRDavid Rosenthal11:11

       ... 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?

   22. BGBen Gilbert11:48

       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.

   23. DRDavid Rosenthal12:00

       Yeah.

   24. BGBen Gilbert12:01

       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?

   25. DRDavid Rosenthal12:11

       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.

   26. BGBen Gilbert12:25

       If you're gonna listen to propaganda, it has to be our propaganda.

   27. DRDavid Rosenthal12:28

       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.

   28. BGBen Gilbert12:39

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

   29. DRDavid Rosenthal12:45

       Yeah. Yes.

   30. BGBen Gilbert12:45

       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]
3. 21:27 – 27:24

   Founding a company in the rubble: engineer haven first, product idea later

   1. DRDavid Rosenthal21:27

      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.

   2. BGBen Gilbert22:30

      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."

   3. DRDavid Rosenthal22:49

      And half of them don't even have homes. [chuckles]

   4. BGBen Gilbert22:51

      Unbelievable.

   5. DRDavid Rosenthal22:52

      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.

   6. BGBen Gilbert23:22

      Yep. Sounds like something founded by a former military academic.

   7. DRDavid Rosenthal23:26

      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?

   8. BGBen Gilbert23:39

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

   9. DRDavid Rosenthal23:44

      There's nothing in it. [chuckles]

   10. BGBen Gilbert23:44

       "We have a lot of engineers." [chuckles]

   11. DRDavid Rosenthal23:46

       We just wanna, like, have a place where engineers can be engineers.

   12. BGBen Gilbert23:49

       Yes.

   13. DRDavid Rosenthal23:50

       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]

   14. BGBen Gilbert24:12

       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.

   15. DRDavid Rosenthal24:25

       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.

   16. BGBen Gilbert24:55

       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.

   17. DRDavid Rosenthal25:06

       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]

   18. BGBen Gilbert25:31

       [chuckles]

   19. DRDavid Rosenthal25:31

       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.

   20. BGBen Gilbert26:00

       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-

   21. DRDavid Rosenthal26:27

       Right, you didn't reach out to me.

   22. BGBen Gilbert26:28

       -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.

   23. DRDavid Rosenthal26:42

       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."

   24. BGBen Gilbert26:59

       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.

   25. DRDavid Rosenthal27:21

       Yeah. Ah, we should go do that someday.

   26. BGBen Gilbert27:23

       Yeah.

4. 27:24 – 30:29

   Morita commits: family blessing, startup capital, and the partnership is sealed

   1. DRDavid Rosenthal27:24

      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.

   2. BGBen Gilbert27:51

      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.

   3. DRDavid Rosenthal28:19

      It's just so hard to imagine, like, what life was like and through those events.

   4. BGBen Gilbert28:24

      We have been very fortunate in the place or, and time that we have grown up, for sure.

   5. DRDavid Rosenthal28:28

      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]

   6. BGBen Gilbert28:42

      [chuckles]

   7. DRDavid Rosenthal28:42

      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.

   8. BGBen Gilbert29:01

      Ah, yes.

   9. DRDavid Rosenthal29:01

      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.

   10. BGBen Gilbert29:19

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

   11. DRDavid Rosenthal29:25

       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.

   12. BGBen Gilbert30:06

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

   13. DRDavid Rosenthal30:15

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

   14. BGBen Gilbert30:21

       The ten percent stake in Sony.

   15. DRDavid Rosenthal30:23

       Well, it depends what years you're talking about here. [chuckles]

   16. BGBen Gilbert30:25

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

5. 30:29 – 34:34

   First breakout product: reel-to-reel tape recorders (and tape) for Japan

   1. DRDavid Rosenthal30:29

      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.

   2. BGBen Gilbert31:21

      Which is the Minnesota Mining and Manufacturing Corporation?

   3. DRDavid Rosenthal31:25

      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]

   4. BGBen Gilbert31:49

      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.

   5. DRDavid Rosenthal32:20

      Yep, and it's all audio at this point.

   6. BGBen Gilbert32:22

      All audio. Yep.

   7. DRDavid Rosenthal32:23

      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]

   8. BGBen Gilbert32:52

      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.

   9. DRDavid Rosenthal33:13

      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.

   10. BGBen Gilbert33:39

       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.

   11. DRDavid Rosenthal34:04

       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.

   12. BGBen Gilbert34:13

       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.

   13. DRDavid Rosenthal34:20

       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.

   14. BGBen Gilbert34:31

       Okay, so that at least gives you some context. Yeah.

6. 34:34 – 45:39

   The transistor gamble: licensing Bell Labs and inventing the portable radio market

   1. DRDavid Rosenthal34:34

      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-

   2. BGBen Gilbert35:07

      Western Electric?

   3. DRDavid Rosenthal35:08

      ... 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.

   4. BGBen Gilbert35:29

      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.

   5. DRDavid Rosenthal36:01

      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."

   6. BGBen Gilbert37:12

      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.

   7. DRDavid Rosenthal37:27

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

   8. BGBen Gilbert37:33

      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."

   9. DRDavid Rosenthal37:44

      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-

   10. BGBen Gilbert38:16

       Ah

   11. DRDavid Rosenthal38:16

       ... 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-

   12. BGBen Gilbert38:56

       Roll off the tongue. [chuckles]

   13. DRDavid Rosenthal38:56

       - 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.

   14. BGBen Gilbert39:21

       It means sound. It sounds cool.

   15. DRDavid Rosenthal39:24

       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.

   16. BGBen Gilbert39:43

       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.

   17. DRDavid Rosenthal40:09

       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.

   18. BGBen Gilbert40:16

       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.

   19. DRDavid Rosenthal40:33

       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.

   20. BGBen Gilbert41:11

       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.

   21. DRDavid Rosenthal41:17

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

   22. BGBen Gilbert41:23

       Oh, yes, people do do that. [chuckles]

   23. DRDavid Rosenthal41:25

       This is where it starts.

   24. BGBen Gilbert41:27

       Especially on hikes in the woods.

   25. DRDavid Rosenthal41:29

       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.

   26. BGBen Gilbert42:06

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

   27. DRDavid Rosenthal42:11

       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.

   28. BGBen Gilbert42:40

       Right. They've got a real corporation on their hands now.

   29. DRDavid Rosenthal42:42

       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.

   30. BGBen Gilbert43:46

       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]
7. 45:39 – 48:43

   Going global: Sony of America and becoming Japan’s bridge to the U.S.

   1. DRDavid Rosenthal45:39

      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.

   2. BGBen Gilbert46:20

      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.

   3. DRDavid Rosenthal46:34

      It was AKM15.

   4. BGBen Gilbert46:36

      Oh, the fif- like, right, 'cause he's 15th generation.

   5. DRDavid Rosenthal46:39

      The 15th generation. [laughing] Yep, yep. [chuckles]

   6. BGBen Gilbert46:42

      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-

   7. DRDavid Rosenthal46:57

      Yeah

   8. BGBen Gilbert46:57

      ... and become a part of this culture to do that." That just wasn't done.

   9. DRDavid Rosenthal47:00

      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-

   10. BGBen Gilbert47:22

       Yep

   11. DRDavid Rosenthal47:23

       ... Howard Stringer. I don't think that happens in any other Japanese corporations.

   12. BGBen Gilbert47:26

       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.

   13. DRDavid Rosenthal48:08

       You wouldn't even say that about Steve Jobs.

   14. BGBen Gilbert48:10

       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.

   15. DRDavid Rosenthal48:23

       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.

   16. BGBen Gilbert48:33

       Not Japanese, yes.

   17. DRDavid Rosenthal48:34

       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.

   18. BGBen Gilbert48:41

       He's the engine that pulled the Martian economy.

   19. DRDavid Rosenthal48:43

       [chuckles]

8. 48:43 – 54:48

   Content enters the story: CBS/Sony Records becomes a cash geyser

   1. DRDavid Rosenthal48:43

      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?

   2. BGBen Gilbert50:03

      Because the C in CBS stands for Columbia?

   3. DRDavid Rosenthal50:06

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

   4. BGBen Gilbert50:15

      I did. I looked this up 'cause I wanted to bust this out for you and be like-

   5. DRDavid Rosenthal50:19

      Ah!

   6. BGBen Gilbert50:19

      ... "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-

   7. DRDavid Rosenthal50:26

      Yes

   8. BGBen Gilbert50:26

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

   9. DRDavid Rosenthal50:37

      Completely independently.

   10. BGBen Gilbert50:37

       And that is not true! They did not stem from the same company.

   11. DRDavid Rosenthal50:40

       No.

   12. BGBen Gilbert50:41

       They are completely different.

   13. DRDavid Rosenthal50:42

       [laughing]

   14. BGBen Gilbert50:42

       And yet Sony ended up buying both of them in their future.

   15. DRDavid Rosenthal50:45

       I know.

   16. BGBen Gilbert50:46

       Unbelievable.

   17. DRDavid Rosenthal50:47

       They didn't reunite the Columbias, they united the Columbias- [laughing]

   18. BGBen Gilbert50:50

       Yes

   19. DRDavid Rosenthal50:51

       ... 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.

   20. BGBen Gilbert52:24

       What?

   21. DRDavid Rosenthal52:24

       It is just a geyser of cash. [chuckles]

   22. BGBen Gilbert52:28

       This is because of the pent-up demand for the Japanese public to buy American recorded records?

   23. DRDavid Rosenthal52:35

       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.

   24. BGBen Gilbert52:47

       Hmm.

   25. DRDavid Rosenthal52:48

       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?

   26. BGBen Gilbert53:19

       Ooh, I have no idea. Nope.

   27. DRDavid Rosenthal53:22

       Norio Ohga, who would succeed-

   28. BGBen Gilbert53:25

       No way!

   29. DRDavid Rosenthal53:25

       ... Morita-

   30. BGBen Gilbert53:26

       Yeah
9. 54:48 – 1:07:29

   Trinitron dominance and the Betamax war: great tech, bad ecosystem outcome

   1. DRDavid Rosenthal54:48

      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.

   2. BGBen Gilbert55:01

      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.

   3. DRDavid Rosenthal55:08

      ... 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.

   4. BGBen Gilbert55:29

      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.

   5. DRDavid Rosenthal56:18

      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.

   6. BGBen Gilbert56:42

      Which this was like a Ibuka thing.

   7. DRDavid Rosenthal56:44

      Yes!

   8. BGBen Gilbert56:45

      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.

   9. DRDavid Rosenthal57:01

      They put up the pirate flag.

   10. BGBen Gilbert57:02

       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."

   11. DRDavid Rosenthal57:34

       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.

   12. BGBen Gilbert57:55

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

   13. DRDavid Rosenthal58:00

       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."

   14. BGBen Gilbert58:05

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

   15. DRDavid Rosenthal58:12

       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-

   16. BGBen Gilbert59:14

       The greatest technology in its class by far-

   17. DRDavid Rosenthal59:17

       ... 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.

   18. BGBen Gilbert59:42

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

   19. DRDavid Rosenthal59:46

       Ah!

   20. BGBen Gilbert59:46

       -just real quick say-

   21. DRDavid Rosenthal59:47

       Yeah, set the context.

   22. BGBen Gilbert59:48

       Anyone who grew up with a VCR, that's the thing that the Betamax lost to.

   23. DRDavid Rosenthal59:53

       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.

   24. BGBen Gilbert1:00:04

       You don't wanna be the next Betamax.

   25. DRDavid Rosenthal1:00:06

       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.

   26. BGBen Gilbert1:00:25

       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.

   27. DRDavid Rosenthal1:00:36

       No, it's, it's... Yeah, literally, you do the recording, not-

   28. BGBen Gilbert1:00:39

       [laughing]

   29. DRDavid Rosenthal1:00:39

       -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-

   30. BGBen Gilbert1:00:58

       [laughing]
10. 1:07:29 – 1:28:08

    The 1980s triple win: CD royalties, Walkman behavior change, and Sony Life

    1. DRDavid Rosenthal1:07:29

       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.

    2. BGBen Gilbert1:07:46

       Unbelievable.

    3. DRDavid Rosenthal1:07:47

       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.

    4. BGBen Gilbert1:08:15

       How crazy is it that we're telling the CD story, the origin of the CD format, before the Walkman?

    5. DRDavid Rosenthal1:08:20

       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.

    6. BGBen Gilbert1:08:35

       Totally. I mean, the first of which being precision lasers, and David, what else spun out of Philips that involves precision lasers?

    7. DRDavid Rosenthal1:08:44

       Ah, that would be ASML, right?

    8. BGBen Gilbert1:08:46

       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.

    9. DRDavid Rosenthal1:09:05

       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.

    10. BGBen Gilbert1:09:39

        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.

    11. DRDavid Rosenthal1:09:54

        So in just a few short years, by 1986, CDs become the dominant recording format by sales, passing records.

    12. BGBen Gilbert1:10:03

        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.

    13. DRDavid Rosenthal1:10:38

        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.

    14. BGBen Gilbert1:11:03

        No, CDs were not portable for a long time.

    15. DRDavid Rosenthal1:11:06

        Yeah.

    16. BGBen Gilbert1:11:07

        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.

    17. DRDavid Rosenthal1:11:24

        Yes.

    18. BGBen Gilbert1:11:25

        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.

    19. DRDavid Rosenthal1:12:43

        Totally, and amazing that it was Morita who did... Like, this is the kind of stuff that Ibuka usually does.

    20. BGBen Gilbert1:12:49

        Yeah.

    21. DRDavid Rosenthal1:12:50

        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.

    22. BGBen Gilbert1:13:08

        Whoa! I didn't realize that.

    23. DRDavid Rosenthal1:13:10

        Yeah. Yeah, he had to sort of, like, literally lay his cards on the table.

    24. BGBen Gilbert1:13:15

        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.

    25. DRDavid Rosenthal1:14:18

        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.

    26. BGBen Gilbert1:14:26

        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."

    27. DRDavid Rosenthal1:16:11

        Notice he doesn't say the name of the first consumer VCR [laughing] there.

    28. BGBen Gilbert1:16:15

        [laughing] Right.

    29. DRDavid Rosenthal1:16:16

        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.

    30. BGBen Gilbert1:16:25

        Yep.
11. 1:28:08 – 1:41:47

    Buying global media: CBS Records and the high-stakes Columbia Pictures deal

    1. DRDavid Rosenthal1:28:08

       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?"

    2. BGBen Gilbert1:29:19

       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."

    3. DRDavid Rosenthal1:29:26

       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.

    4. BGBen Gilbert1:30:00

       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.

    5. DRDavid Rosenthal1:30:31

       Didn't you actually... Y- You sent me one that was, like, a Donald Trump interview from this time-

    6. BGBen Gilbert1:30:36

       I did, yes

    7. DRDavid Rosenthal1:30:36

       ... where he's bashing Japan. Yeah. Great.

    8. BGBen Gilbert1:30:38

       Yes. Yep.

    9. DRDavid Rosenthal1:30:40

       [sighs] It's the world we live in.

    10. BGBen Gilbert1:30:42

        So much changes, and yet so much stays the same.

    11. DRDavid Rosenthal1:30:45

        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]

    12. BGBen Gilbert1:31:49

        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]

    13. DRDavid Rosenthal1:31:59

        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.

    14. BGBen Gilbert1:32:24

        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.

    15. DRDavid Rosenthal1:32:44

        Yeah, this was a great deal. On the back of this, they are enticed to do another media content deal.

    16. BGBen Gilbert1:32:52

        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.

    17. DRDavid Rosenthal1:33:53

        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.

    18. BGBen Gilbert1:34:08

        Yep.

    19. DRDavid Rosenthal1:34:08

        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.

    20. BGBen Gilbert1:35:34

        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.

    21. DRDavid Rosenthal1:36:24

        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]

    22. BGBen Gilbert1:37:07

        Hmm.

    23. DRDavid Rosenthal1:37:07

        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]

    24. BGBen Gilbert1:37:22

        Which in some ways, it... I mean, gaming is definitely the most credible.

    25. DRDavid Rosenthal1:37:25

        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.

    26. BGBen Gilbert1:37:52

        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.

    27. DRDavid Rosenthal1:38:42

        These cameras are incredible.

    28. BGBen Gilbert1:38:43

        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!"

    29. DRDavid Rosenthal1:38:56

        It is truly torture. [chuckles]

    30. BGBen Gilbert1:38:58

        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.
12. 1:41:47 – 1:58:24

    PlayStation’s origin story: Nintendo’s betrayal creates Sony’s biggest business

    1. DRDavid Rosenthal1:41:47

       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.

    2. BGBen Gilbert1:43:34

       Round the corners, make some purple buttons.

    3. DRDavid Rosenthal1:43:37

       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."

    4. BGBen Gilbert1:43:52

       Oh.

    5. DRDavid Rosenthal1:43:53

       An audio processor.

    6. BGBen Gilbert1:43:54

       'Cause all sounds in video games before were just, you know, doo, doo, doo, doo, doo.

    7. DRDavid Rosenthal1:44:00

       Beeps and boops.

    8. BGBen Gilbert1:44:01

       Yeah.

    9. DRDavid Rosenthal1:44:02

       Yeah, the Super Nintendo had super great audio, like, really good stuff.

    10. BGBen Gilbert1:44:06

        Huh.

    11. DRDavid Rosenthal1:44:07

        And Ken and Sony designed that chip that made it possible.

    12. BGBen Gilbert1:44:12

        Ah.

    13. DRDavid Rosenthal1:44:12

        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]

    14. BGBen Gilbert1:44:21

        Whoa!

    15. DRDavid Rosenthal1:44:22

        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.

    16. BGBen Gilbert1:45:37

        Hmm.

    17. DRDavid Rosenthal1:45:38

        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."

    18. BGBen Gilbert1:46:30

        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.

    19. DRDavid Rosenthal1:46:49

        The Sony PlayStation- [laughs]

    20. BGBen Gilbert1:46:53

        [laughs]

    21. DRDavid Rosenthal1:46:53

        ... that plays Super Nintendo games. [laughs] Oh, my gosh. So this is all done. They made this freaking product.

    22. BGBen Gilbert1:47:01

        Did they ship it?

    23. DRDavid Rosenthal1:47:03

        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.

    24. BGBen Gilbert1:47:57

        No way!

    25. DRDavid Rosenthal1:47:58

        Yes. [laughs]

    26. BGBen Gilbert1:48:00

        What?

    27. DRDavid Rosenthal1:48:01

        Yes.

    28. BGBen Gilbert1:48:01

        And they just kept Sony in the dark the whole time?

    29. DRDavid Rosenthal1:48:04

        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]

    30. BGBen Gilbert1:48:21

        Whoa
13. 1:58:24 – 2:02:40

    Console dominance—and the PS3 stumble: when “computers” and formats become a trap

    1. DRDavid Rosenthal1:58:24

       Yep. And the other thing that the PS2 had was backwards compatibility-

    2. BGBen Gilbert1:58:30

       Yes

    3. DRDavid Rosenthal1:58:30

       ... 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.

    4. BGBen Gilbert1:58:48

       It took a while to get going, but ultimately did become a pretty successful system.

    5. DRDavid Rosenthal1:58:52

       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.

    6. BGBen Gilbert1:59:17

       Huh.

    7. DRDavid Rosenthal1:59:18

       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.

    8. BGBen Gilbert1:59:27

       And the Blu-ray made the price tag kind of expensive.

    9. DRDavid Rosenthal1:59:30

       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.

    10. BGBen Gilbert1:59:48

        Hmm.

    11. DRDavid Rosenthal1:59:48

        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.

    12. BGBen Gilbert2:00:09

        Hmm.

    13. DRDavid Rosenthal2:00:10

        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.

    14. BGBen Gilbert2:00:31

        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-

    15. DRDavid Rosenthal2:00:44

        Yes

    16. BGBen Gilbert2:00:44

        ... kinda forget that you still have a game to play.

    17. DRDavid Rosenthal2:00:46

        Yes.

    18. BGBen Gilbert2:00:47

        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.

    19. DRDavid Rosenthal2:01:35

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

    20. BGBen Gilbert2:01:41

        Yeah.

    21. DRDavid Rosenthal2:01:42

        At least with the PS3, like, they completely messed it up. Sony loses five billion dollars on the PS3 in the first three years.

    22. BGBen Gilbert2:01:52

        Wow!

    23. DRDavid Rosenthal2:01:53

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

    24. BGBen Gilbert2:01:59

        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.

    25. DRDavid Rosenthal2:02:36

        ... I don't think so either. I think it became a, a big albatross for them.

14. 2:02:40 – 2:19:07

    2000s–2010s turbulence: TVs bleed, PCs/phones fail, and Sony pivots to ‘arms dealer’ wins

    1. BGBen Gilbert2:02:40

       So the early 2000s are, they're just getting beat up left and right.

    2. DRDavid Rosenthal2:02:43

       Yeah. In 2006, they lose the number one market share lead in televisions for the first time.

    3. BGBen Gilbert2:02:51

       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.

    4. DRDavid Rosenthal2:03:02

       They basically pay you to take them.

    5. BGBen Gilbert2:03:04

       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.

    6. DRDavid Rosenthal2:03:14

       Yep. And that Sony Bravia was... I mean, those things were, like, $5,000-

    7. BGBen Gilbert2:03:18

       Yeah, it was crazy

    8. DRDavid Rosenthal2:03:19

       ... 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.

    9. BGBen Gilbert2:03:38

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

    10. DRDavid Rosenthal2:03:42

        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.

    11. BGBen Gilbert2:03:50

        But it's, like, owned by private equity or something.

    12. DRDavid Rosenthal2:03:53

        Uh, it's not a core part of the business anymore.

    13. BGBen Gilbert2:03:55

        Hmm.

    14. DRDavid Rosenthal2:03:56

        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.

    15. BGBen Gilbert2:04:06

        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.

    16. DRDavid Rosenthal2:05:39

        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.

    17. BGBen Gilbert2:05:50

        Nope.

    18. DRDavid Rosenthal2:05:50

        And Blu-ray players do not become a major consumer electronic staple.

    19. BGBen Gilbert2:05:55

        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.

    20. DRDavid Rosenthal2:06:39

        But that's so far. [chuckles]

    21. BGBen Gilbert2:06:41

        Right.

    22. DRDavid Rosenthal2:06:41

        It'll be interesting to see what happens going forward.

    23. BGBen Gilbert2:06:44

        Yep.

    24. DRDavid Rosenthal2:06:45

        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.

    25. BGBen Gilbert2:07:11

        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] .

    26. DRDavid Rosenthal2:07:22

        Yeah.

    27. BGBen Gilbert2:07:23

        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.

    28. DRDavid Rosenthal2:08:04

        It's like a Prime membership.

    29. BGBen Gilbert2:08:05

        Yes.

    30. DRDavid Rosenthal2:08:06

        It's financially irresponsible as a gamer not to subscribe to Game Pass. [chuckles]
15. 2:19:07 – 2:52:15

    Sony today: diversified segments, Spider-Man economics, and the bull/bear debate

    1. DRDavid Rosenthal2:19:07

       Definitely a lot of stuff. [laughing] Okay, so all the stuff, where does this leave us?

    2. BGBen Gilbert2:19:12

       Yes, today.

    3. DRDavid Rosenthal2:19:12

       What's the picture of Sony today?

    4. BGBen Gilbert2:19:14

       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.

    5. DRDavid Rosenthal2:19:27

       Electronics are consumer electronic devices?

    6. BGBen Gilbert2:19:30

       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.

    7. DRDavid Rosenthal2:20:00

       Or negative, right?

    8. BGBen Gilbert2:20:01

       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.

    9. DRDavid Rosenthal2:20:42

       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.

    10. BGBen Gilbert2:20:54

        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.

    11. DRDavid Rosenthal2:21:12

        ... Hmm, what a collection of stuff! [chuckles]

    12. BGBen Gilbert2:21:15

        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.

    13. DRDavid Rosenthal2:21:26

        Yeah.

    14. BGBen Gilbert2:21:27

        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.

    15. DRDavid Rosenthal2:22:22

        Okay.

    16. BGBen Gilbert2:22:22

        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?

    17. DRDavid Rosenthal2:22:42

        Ooh! I don't.

    18. BGBen Gilbert2:22:45

        That seven and a half billion would be the box office gross receipts for the Spider-Man franchise.

    19. DRDavid Rosenthal2:22:52

        Ah, [laughing] yes.

    20. BGBen Gilbert2:22:55

        [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."

    21. DRDavid Rosenthal2:23:26

        Yes. All right, what's going on? Why does Sony have Spider-Man?

    22. BGBen Gilbert2:23:29

        [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-

    23. DRDavid Rosenthal2:24:18

        Free money.

    24. BGBen Gilbert2:24:19

        "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.

    25. DRDavid Rosenthal2:25:06

        [laughing]

    26. BGBen Gilbert2:25:07

        Sony has the right to produce Spider-Man movies forever.

    27. DRDavid Rosenthal2:25:12

        Forever?

    28. BGBen Gilbert2:25:14

        Yes, in perpetuity, as long as they release one every five years and nine months. [laughing]

    29. DRDavid Rosenthal2:25:20

        [chuckles] So we can guarantee-

    30. BGBen Gilbert2:25:22

        [laughing]

Episode duration: 3:04:05