Week 6:
Sony-Ericsson
Case study
Sony-Ericsson mobile phone joint venture dependent on
technology transfer1
This case study provides an excellent example of why firms
engage in technology transfer. It provides practical evidence
illustrate the benefits of technology transfer and licensing. The
case also illustrates the difficulty of operating in a highly
competitive and rapidly developing industry. The joint venture
(JV) established by Sony and Ericsson takes time develop,
and eventually the JV has some success. Big questions
remain however, for the firm. Is the mobile handset market
one in which it can succeed? Or is it simply too competitive?
to
Introduction
In April 2001 Ericsson, the Swedish telecommunications equipment group, and Sony of Japan
established a joint venture in mobile phones. The venture, based in London, brought together the two
companies' loss making handset businesses. The news was generally accepted as good for both
companies. It would combine Sony's consumer products expertise with Ericsson's extensive knowledge of
cell phone networks. Ericsson is the world's leading maker of wireless networks. It would give Ericsson
access to Sony's multimedia technology, branding expertise and knowledge acquired from Japan's early
start in 3rd generation cell phone technology. Sony would gain access to Ericsson’s telecommunications
technology and its distribution. The two companies hoped to create a market leader to threaten the
dominance of Nokia of Finland within five years. In 2000 the two companies together shipped 50m or
$7.2bn worth of mobile phones, giving them a 12 per cent market share and third position after Nokia of
Finland and Motorola of the US.
The wider business environment, however, was extremely challenging. At
the start of the new century despite the huge growth in cell phones few
handset manufacturers were making profits. Nokia was the clear market
leader and was producing a profit but Motorola, Phillips, Sony, Ericsson,
Siemens, Matsushita, Mitsubishi and others were struggling to deliver
profits. Indeed, Ericsson made a loss of £1.6bn on handsets in 2000 and the
group announced thousands of job losses. Ericsson suffered from poor
1 This case has been written as a basis for class discussion rather than to illustrate effective or ineffective
managerial or administrative behaviour. It has been prepared from a variety of published sources, as indicated, and
from observations.
handset design, delays in getting them to market and failure to anticipate a market shift to low-end
phones. Sony was in a different position. It had well-designed phones but a much smaller global market
share - less than 2 per cent, but the impending launch of 3G phones would provide an enormous
opportunity for Sony to exploit its multimedia technology portfolio. In particular liquid crystal display
technology, digital camera, and music and video technology all of which are expected to be driving forces
behind the launch of 3G.
Rationale of alliance for Sony
The strategic alliance with Ericsson is part of an ambitious
expansion led by Nobuyuki Idei, chairman and chief executive, to
transform Sony into a global media, communications and network
conglomerate. Sony has invested in semiconductors and
broadband technology, an online bank and issue a tracking stock
to
give So-net, its internet service provider, the means to acquire
other ISPs. But, Sony has delivered disappointing financial results
for investors over the past few years and Sony will need to
accelerate the pace of other changes within the company and develop further new products or else it will
fall behind in the next generation of products.
The move into a new business area such as cell phones is welcomed by investors who argue that Sony
has been too slow to move away from its traditional businesses such as music stereos, televisions, VCR,
DVD and camera recorders. At the same time, market conditions have deteriorated: in consumer
electronics, the weakening of consumer confidence after the September 11 (2001) attacks on the US has
come on top of already sluggish demand and falling prices.
Certain products, such as low-end stereos made by Aiwa, Sony's 61 per cent-owned subsidiary, are
increasingly dominated by low-cost Chinese and South Korean manufacturers. In addition the games
division, which in 1998 accounted for 44 per cent of operating profits, has been mired in losses.
Increasing competition from Nintendo’s GameCube and Microsft’s Xbox will put further pressure on
Sony’s PlayStation2.
Rationale of alliance for Ericsson
For Swedish-based Ericsson, the venture will give it
access to Japanese knowledge of third-generation
technology this should help it compete in the fiercely
competitive handset market. While Ericsson has been
dominant in providing technology for the network market, it has increasingly struggled to stay in the top
league among handset producers. Ericsson has a long history in microelectronics and its customers
come not just from the telecoms industry, but from a variety of other sectors, including avionics,
computing, military, and space. Nonetheless, Ericsson has been badly hit by the downturn in the global
telecoms equipment market, and it accumulated huge losses in the mobile phone businesses. The group
recorded an underlying loss of more than $980m in 2000. Ericsson Microelectronics supplies Ericsson
and other customers. It employs 2,500 people and has annual sales of more than SKr5bn. The division
makes a range of products such as radio frequency power transistors, as well as chips designed to
support ‘Bluetooth’, a wireless communications standard. Manufacturing is carried out in Sweden,
California, Texas and China while design centres are located in Sweden, Norway, the UK, and the US.
The business has its headquarters in Kista, a high-technology suburb and major centre of Ericsson
operations just north of Stockholm.
The business of making handsets has changed beyond all recognition in recent years from a niche, hightech activity to the world's biggest consumer electronics industry. As rivals have jumped on the gravy train
and developed markets have neared saturation, mobile phones have become commodity items where
efficient manufacturing becomes a vital part of staying ahead. In particular, Nokia has demonstrated that
the two most important factors in a successful handset business are fashion and speed to market. This is
because suppliers have become increasingly reliant on the replacement market since the majority in
many countries owns a phone. Ericsson has been grappling with this for some time but has continually
failed to find the magic formula for churning out fashionable models fast enough to keep up with changing
technology. Notwithstanding the joint venture with Sony Ericsson intends to retain a large research and
development division focusing on handsets, which is vital to ensure its network business stays in touch
with consumer demands.
How does cell phone technology work?
Few people realise that a cell phone is much more like a radio than a conventional wired telephone.
Indeed, cell phone technology is a development of radio technology rather than wired telecommunications
technology. That is, it picks up signals from transmitters. The cell phones we use today were developed
from ‘Business’ radio communication devices such as those as used by Taxi firms and Emergency
Services. These allow one party to talk at a time. You push a handset button to talk then release the
button to listen. The use of the word “over” was used to indicate the end of a message. This eliminated
echo problems, which took many years to solve before natural, full duplex communications was possible.
This proved to be an extremely difficult technical problem to overcome. Simplex, used in business radio,
shares a single frequency for both people talking. With cell phones technology the transmitting and
receiving frequencies are different, and offset from each other to prevent interference.
Each cell phone requires a cellular system. When we say a cellular system, it means a division of a city or
town into small cells. Each cell has a base station that consists of a tower and a small building containing
radio equipment, this allows widespread frequency reuse across an area, so that millions of people can
use cell phones concurrently. Each cell is typically sized at and covers about a 10 square miles radius.
Figure 10.8: A simplified cellular technology system
Cellular technology uses a principle called frequency reuse to greatly increase customers served. Low
powered mobiles and radio equipment at each cell site permit the same radio frequencies to be reused in
different cells, multiplying calling capacity without creating interference. This spectrum efficient method
contrasts sharply with earlier mobile systems that used a high powered, centrally located transmitter, to
communicate with high powered car mounted mobiles on a small number of frequencies, channels which
were then monopolized and not re-used over a wide area.
There is a requirement to have a large number of base stations in a city of any size to make cell phone
use function conveniently. A typical large city can have hundreds of towers placed in certain regions to
cover most of the areas completely. Central offices called the Mobile Telephone Switching Office (MTSO)
handles all of the phone connections to the normal land-based phone system, and controls all of the base
stations in the region. Each network operator, such as Vodaphone, 02, Virgin and Orange in the UK runs
one (see Figure 1).
Moving from cell to cell within a network
All cell phones have special codes related to them. These codes are used to identify the phone's owner,
phone, and the service provider that they use. Here is what happens when you use your mobile phone:
When a person first turns on their phone, it listens for a System Identification Code (SID) on the control
channel. This is a unique frequency that the phone and base station use to send signals to another about
things like call set-up and channel changing. If the phone can’t find any control channels to listen to, then
it‘s out of range and will display on the phone a "no service" message. When it receives the SID, the
phone matches up to the SID programmed into the phone. If the SIDs match, the phone realizes that the
cell it is corresponding with is part of its home system. The phone also transmits a registration request,
along with the SID and the MTSO keeps track of your phone's location in a database -- this way it is
known what cell you are in when it wants to ring your phone. The MTSO gets the call that is calling you
and it tries to find you by looking in its system to see which cell you are in. The call is sent to you at that
time. You are now talking by two-way radio to a friend!
As you travel and move near the end of your cell, your cell's base station sees that your signal strength is
diminishing. In the meantime, the base station in the cell you are moving closer to sees your phone's
signal strength increasing. The two base stations coordinate with each other through the MTSO, and at
some point, your phone gets a signal on a control channel telling it to change frequencies. This hand off
switches your phone to the new cell with out interruption to you and your call. As you travel, the signal is
passed from cell to cell.
Inside a Cell Phone handset
Cell phones are some of the most intricate devices people play with on a daily basis. Modern digital cell
phones can process millions of calculations per second in order to compress and decompress the voice
stream. The cell phone comprises the following key individual parts:
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
A circuit board containing the brains of the phone
An aerial
A liquid crystal display (LCD)
A keyboard (similar to a TV remote control)
A microphone
A speaker

A battery
The Circuit Board
The circuit board is the heart of
system. The analog-to-digital and
digital-to-analog conversion chips
translate the outgoing audio
signal from analog to digital and
incoming signal from digital back
analog. The digital signal
processor (DSP) is a highly
customized processor designed
perform signal-manipulation
calculations at high speed. The
microprocessor handles all of the
housekeeping chores for the
keyboard and display, deals with
command and control signalling
the base station and also
coordinates the rest of the functions on the board.
the
the
to
to
with
The ROM and Flash memory chips provide storage for the phone's operating system and customisable
features, such as the phone directory. The radio frequency (RF) and power section handles power
management and recharging, and also deals with the hundreds of FM channels. Finally, the RF amplifiers
handle signals travelling to and from the aerial.
The display has grown considerably in size as the number of features in cell phones have increased.
Most current phones offer built-in phone directories, calculators music and games. And many of the
phones incorporate some type of PDA or Web browser. Some phones store certain information, such as
the SID and MIN codes, in internal Flash memory, while others use external cards that are similar to
Smart Media cards.
Cell phones have such tiny speakers and microphones that it is incredible how well most of them
reproduce sound. The battery, is used by the cell phone's internal clock chip.
Technology transfer
The increasing technological content of cell phones, as illustrated above, has forced many firms in the
industry to search for technology partners who can provide the additional technology required such as
multi-media, digital camera, games etc. For these firms to try to develop expertise in these areas would
be too expensive and too slow for the rapid technological changes that are occurring in the cell phone
market. Indeed, the cell phone market is an excellent example of the increasing complexity of
technologies and the increasing range of technologies found within products. This has led to a shortening
of product life-cycles within the cell phone market. Many users now change their handset after 18
months-2 years. In addition, companies are finding it increasingly difficult to sustain R&D capability over
all areas of their business as the complexity of these areas increases. Internal R&D is increasingly
focused on core competencies, while R&D in all other business activities is progressively covered by
collaborations, partnerships and strategic alliances.
Ericsson is the world leader in cell phone networks and has a long established reputation in the
microelectronics industry stretching back over fifty years. Hence, it has extensive knowledge and
expertise of cell phone technology. Sony on the other hand does not, but it does have an extensive
portfolio of other technologies that may be useful in 3rd and 4th generation cell phones. Some of Sony’s
technology portfolio includes the following:
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
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HDTVs, Flat-panel Plasma and LCD WEGA® TVs, FD Trinitron® WEGA® CRT televisions, CRT
rear projection TVs, and Grand WEGA® LCD rear projection televisions
DVD-video players/recorders, VCRs, Super Audio CD players, and home theater-in-a-box
systems
Hi-Fi components (AV receivers), shelf systems and speakers
Walkman® personal stereos, MiniDisc Walkman® players/recorders and personal digital music
players
Handycam® camcorders
Cybershot® and Mavica® digital still cameras
Memory Stick® flash media
VAIO® desktop and notebook computers
CLIÉ™ handheld devices
Video conferencing products
Visual imaging products
Professional digital photography systems
E-communication and digital signage
OEM Li-ion and li-polymer batteries
Semiconductor devices, including Sigma RAM memory, ICs, CCD sensors, optical comm. ICs,
GPS and cellular/PCs ICs
New products emerge from Sony Ericsson
In 2002, one year after its launch, Sony Ericsson unveiled its first six new handset models, including three
with colour screens and one with a built-in camera. At the time Nokia, the market leader, did not have a
colour screen phone on the market, although it was planning to launch a camera-phone by the middle of
2002. Sony Ericsson said it would launch its first 3G handset by the end of 2002. It also unveiled an
alliance with Sony's film business to provide games on its new colour screen phones, which would be
based on the films Men in Black and Charlie's Angels. Further new handset models were planned to
utilise Sony’s product design strengths. In 2002 the launch of next generation mobile services (so called
3rd generation), were being held up by the financial difficulties of many operators and technical delays in
the development of new handsets. The 3G phones were expected to drive demand for a wider range of
applications on mobile phones.
In 2003 Sony Ericsson announced disappointing end of year results. Its market share did not achieve 6
per cent in 2002, compared with a 7 to 10 per cent target, forcing its owners to plough extra cash into the
start-up after it failed to reach profitability as planned. The results placed Sony Ericsson 5 th in terms of
market share. The company president, Katsumi Ihara admitted:
"Last year wasn't a good year for Sony Ericsson, we expected a better business market at
the beginning of the joint venture." But failure is not an option for 2003, he says. "We
cannot accept the fact that Sony Ericsson can continue to lose money. We need to turn
around the business."
He points to three main causes of the poor performance;
 problems integrating teams from Sony and Ericsson
 market share losses in China
 strong competition in the US.
The picture in 2003 was very different to the one painted in 2001 when
the two firms got together. The product and brand skills of Sony and
the telecommunication and distribution skills of Ericsson were thought
to be an ideal marriage. Competing with market leaders Nokia,
Motorola and Samsung has proved extremely tough. And now other
handset makers such as Alcatel and Sagem are beginning to deliver
new products into an already crowded market place. The signs are
worrying for Sony Ericsson. There may be job losses ahead. Alcatel and Sagem have much lower market
share figures than Sony Ericsson and yet they are both able to deliver profits. Without the success of its
T68 handset, which it inherited from the old Ericsson design team, market share would have been several
percentage points lower. Kurt Hellström, former Ericsson chief executive and Sony Ericsson chairman,
caused further controversy by suggesting that the Swedish group could halt further investment in the joint
venture if there was no evidence of a turn- round. The joint venture is a long way short of becoming the
market leader as was suggested at its launch in 2001 and Sony Ericsson desperately needs to show that
it can manufacture a broad range of compelling phones as it tries to revitalise its flagging market share.
In 2003 there were signs of a change of fortunes: market share in China climbed on the back of sales of
its low-end T100 phone and its upmarket colour screen T68. Also, newly launched handsets such as its
top-of-the-range P800 phone, sold well in early trials. Combined with the launch of "more cute and sexy"
models including camera phones "in all price segments". In addition to new products Sony Ericsson is
looking to trim costs by moving more handset production to China and cutting other operational
expenses.
Good news at last
In 2003 the Sony and Ericsson joint venture reported its first quarterly profit since its inception in 2001.
Sony Ericsson's sales rose to €1.3bn. This improvement was particularly due to high demand for its new
camera phones in Japan and to the success of its T610 series. In 2004 it launched five new mobile
phones with in-built cameras to take advantage of the growing demand for sending and receiving pictures
over mobile handsets. Its Z200 and Z600 Clamshell handsets also proved extremely popular. It is also
planning to launch a series of very low-cost, entry-level phones for markets such India, China and Brazil.
Sony Ericsson is planning to take more of its mobile phone manufacturing plants under its own control to
smooth out supply chain problems and help it take market share. It is in talks to raise its stake in Beijing
Ericsson Putian Mobile Communication, a manufacturing facility outside Beijing, and could consider other
similar deals in the future. The company is keen to avoid a repeat of 2002, when it failed to take full
advantage of booming pre-Christmas demand for phones because of component shortages, and lost
market share. However, the decision to bring more factories under direct control is a reversal of parent
company Ericsson's policy - in 2001 just before setting up the joint venture - of outsourcing all its handset
manufacturing to companies such as ‘Flextronics’. About 30 per cent of Sony Ericsson phones are
produced in factories controlled by the company while 70 per cent of production is outsourced. Sony
Ericsson is aiming for 50 per cent production in factories controlled by the company.
Using the iconic Walkman brand to compete
The Sony Walkman become one of the world’s most familiar brands. It emerged first in the late 1970's
and attained an unparalleled position as the most recognised consumer
electronic
good throughout the 80's and 90's. Even with the emergence of
MP3
technology and the shift of music from cassettes and CD's to
files, the
Walkman brand has power. It is for this reason that Sony has
reused
the Walkman in as many formats as possible to try and
capitalise on the brand awareness that the Walkman still
achieves. The Walkman branding came back in a big way
at
the beginning of 2006 with the release of a range of
Walkman branded Sony Ericsson Phones that attempted to capture the era of music player capability
within mobile handsets. The Sony Ericsson W580i Walkman, offers music, the Internet, pictures,
organizer functions and calls. There is a Walkman button on the phone that takes you directly to the
music. One interesting feature of the W580i is a pedometer that keeps track of your movement, whether
you are running or walking.
Competition continues to increase
The cell phone handset market is one of the world’s most fiercely contested markets. The reasons for this
are long and varied. One clear reason is that many technology forecasters see the handset as the future
hub of all virtually all technology; with people accessing all forms of media via their handset. Nokia, the
world leader in handsets has faced fierce competition not just from Sony Ericsson, but from Samsung,
Motorola and others. In 2005 Nokia sold 265 million handsets worldwide, but even so its global market
share has fell from 38% to 30% in 2004. In contrast Sony Ericsson has made progress towards its goal of
becoming the industry's number three manufacturer by generating more revenue than Samsung
Electronics during 2006. Sony Ericsson leapfrogged LG Electronics to become the industry's number four
during 2006 (see Table 1 below). Miles Flint, president of Sony Ericsson, hailed 2006 as an "extraordinary
year". Sony Ericsson recorded sales of €11bn for 2006, up 51% on 2005. Pre-tax profit for 2006 was
€1.3bn, up 160%. The launch in January 2007 of the iphone by Apple will add even further competition to
this dynamic market.
Table 1: Global handset market share
Manufacturer Market share Market share
position
position
(2005)
(2006)
Nokia
1
1
Motorola
2
2
Samsung
3
3
Sony-Ericsson 4
4
LG Electronics 5
5
BenQ
6
Others
7
In November 2008 in a decision that surprised many, the world's largest cell phone maker decided to pull
out of one of the world's biggest cellular markets. Nokia announced that it was withdrawing from the
Japanese market. This market is arguably the most competitive cell phone market in the world. The
company was active in Japan in the 1990s, supplying handsets for the country's proprietary secondgeneration PDC networks. Nokia's decision probably says more about the Japanese market than it does
about Nokia. Handsets from NEC, Fujitsu, Sharp, Panasonic and other domestic makers, which are
typically developed in close cooperation with carriers and highly tuned to local tastes, are most popular in
Japan and no foreign phone maker enjoys the same level of popularity in Japan than it does in other
major markets.
2008 was another fiercely competitive year for all the handset manufacturers. Although global mobile
handset shipments grew in 2008, Motorola, Sony Ericsson and Apple all lost market share to stronger
competitors. Emerging markets in Asia and Africa drove the surge in growth in 2008, compensating for
sluggish demand in developed regions of North America and Western Europe.
. . . all losing market share!
The first quarter results for 2008 reveal difficult times for the big brands. While still a newcomer to the
mobile handset market, Apple saw global handset shipments fall sharply, from 2.3 million units to 1.7
million units. This resulted in the first decline in the company’s market share, which dropped from 0.7% to
0.6%. Third placed Motorola suffered yet more woes as its market share dropped sharply from 12.4% to
9.7%, while Sony Ericsson experienced a decline from 9.4% to 7.9%. Market leader Nokia saw its share
remain unchanged at 40%. It has been the Korean firms of LG and Samsung that have increased their
market shares. Improved handset portfolios have enabled LG to grow at almost four times the annual
industry average, while Samsung is grew at two times faster.
Conclusions
In 2004 Sony Ericsson at last delivered the financial results investors had been waiting for. Units shipped
in the first quarter reached 8.8 million, a 63% increase compared to the same period the previous year.
Sales for the quarter were to €1,338 million, representing a year-on-year increase of 66%. In addition, the
restructuring measures that were taken in 2003 are now fully contributing to the bottom line. In an overall
strong mobile phone market, shipments from Sony Ericsson reached an all time high as its product
offering in the mid- and entry level segments continued to gain momentum. Market share increased
during the quarter thanks to strong demand and increased operational efficiencies.
The case illustrates how two large multi-technology firms such as Sony and Ericsson, operating in several
technology fields found it extremely difficult and expensive to be technological leaders in every
technology within their scope. It shows how Sony and Ericsson used technology transfer to enhance their
own technology portfolio to shorten product development time and to avoid the costs and delay of
research and development.
The longer term problem for Sony Ericsson is that it operates in a highly volatile market, that of the
technology fashion market. The problem is that fashionable status is ephemeral. Buyers of trendy goods–
such as the latest mobile phones–quickly switch to the next "well cool" item. In the case of handsets, it is
usually within 12 to 18 months. One of the questions for Sony Ericsson, is whether it can retain shoppers
when they tire of their Sony Ericsson phone. Will they stick with the brand or move to one of its
competitors? How much money is Sony-Ericsson willing to invest in branding?
Achieving profitability is obviously good, but whether Sony Ericsson's business model is sustainable is not
answered by one or two quarterly results. It plans to continue to supply a full range of phones, from cheap
to expensive. Putting all its efforts into just one segment may make more sense. If Sony Ericsson can
master how to keep fashion victims interested, it may yet become a successful niche player and capture
more market share. But this is a very competitive market and Sony and Ericsson may decide that there
are other markets that could prove more profitable.
An interesting side story to this case is the technology development of cellular technology. It seems that
the technology existed for many years and was extremely slow to develop. If one considers that ‘one-way
business radio’ has been around for fifty years. It seems funding to develop the technology was not
forthcoming because people didn’t perceive how popular cellular radio would become nor how cheap the
service would eventually be. If anyone had suspected such a great demand then funding would certainly
have flowed much earlier. In the 1970s and 1980s cellular technology was thought of as an evolution of
early radio telephones, a better way to provide a few people with a telephone for their cars. It was not
thought that cellular technology would revolutionize communications for everyone.
Sources
Brown-Humes C and Nakamoto M (2001); Harney A (2001); Budden R (2003); Pesola M (2004); BrownHumes and Daniel C (2001); Roberts and Brown-Humes (2001)
Parker A (2007) Sony Ericsson edges ahead of Samsung FT.com site, Jan 17.
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Case study questions
Ericsson is the world leader in cell phone networks and has many years of experience of
handsets. Explain how Sony’s technology portfolio has helped the joint venture.
Explain why a cell phone is more like a radio than a wired telephone.
Explain why Sony and Ericsson were finding it increasingly difficult to sustain R&D over all of
their businesses?
Explain why is Ericsson maintaining a large R&D division focussing on handsets when its
joint venture with Sony is also conducting R&D and product development of handsets?
Discuss why at times the cell phone handset market seems to be more like the fashion
clothing industry.
Many firms are outsourcing more and more of their activities and focussing on core activities.
What are the advantages for Sony-Ericsson in bringing manufacturing back under its control?
What are the advantages and disadvantages of outsourcing?
This is a fierce industry to try to compete. Should Sony-Ericsson quit?