Sony 2003 Annual Report Download - page 100

Consolidated Financial Information 2003
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primarily due to an increase in advertising and promotion expenses in conjunction with the increase in units sold, the
ratio of selling, general and administrative expenses to sales decreased as compared to the previous fiscal year.
Music
Sales for the fiscal year ended March 31, 2003 decreased by 6.5 billion yen, or 1.0 percent, to 636.3 billion yen
compared with the previous fiscal year. Compared to operating income of 20.2 billion yen in the previous fiscal year,
an operating loss of 8.7 billion yen was recorded this year.
On a local currency basis, sales in the Music segment increased by 1 percent while the Music segment incurred
an operating loss as compared to operating income in the previous fiscal year.
Sales at SMEI increased approximately 6 percent on a U.S. dollar basis (refer to “Foreign Exchange
Fluctuations and Risk Hedging” below). In terms of profitability, SMEI incurred an operating loss in the current year
as compared to operating income in the previous fiscal year. The increase in sales was primarily due to an increase
in sales of DVD software, manufactured in the Music segment, to the Pictures and Game segments. Sales to the
Pictures segment increased as a result of the greater popularity of DVD media in the home entertainment market and
sales to the Game segment increased due to higher unit sales of PlayStation 2 software titles, which are packaged on
DVDs. Partially offsetting the increase in sales at SMEI was a decline in album sales in many regions worldwide.
Album sales at SMEI have been declining due to the continued contraction of the global market for music.
Industry-wide album unit sales in the U.S. decreased for 19 consecutive months up to and including March 2003.
Such sales in the fiscal year ended March 31, 2003 were 10 percent lower than in the previous fiscal year. This
contraction trend has been caused by slow economic growth, the saturation of the CD market, the effects of digital
piracy and other illegal duplication, parallel imports, pricing pressures and a diversification of customer preferences
brought on by increased competition from other entertainment sectors.
The decline in profitability resulting in an operating loss at SMEI primarily resulted from a 120 million U.S. dollar
year on year increase in restructuring charges undertaken to reduce costs in response to the downward trend of the
market. The total cost of restructuring for the fiscal year ended March 31, 2003, was approximately 190 million U.S.
dollars, or 22.4 billion yen (refer to “Restructuring” for details) net of a reversal of an expense of 30.8 million U.S.
dollars accrued in previous fiscal years as a result of reduced compensation expense. The second largest factor
leading to the operating loss was a decrease in gross profit brought about by the decrease in album sales. The third
factor leading to operating loss was an increase in talent-related expenses, primarily because the continued decline
in album sales led to an increase in impairments of capitalized advances paid to artists. Partially offsetting the decline
in operating profitability, in descending order of magnitude, were a decrease in advertising and promotion expenses,
savings realized from previously implemented restructuring initiatives and higher income generated by the increase
in DVD software manufacturing activity. Although restructuring expenses increased significantly compared with the
previous fiscal year, the decrease in advertising and promotion expenses and savings realized from previously
implemented restructuring initiatives caused a decrease in selling, general and administrative expenses for the year
and an improvement in the ratio of selling, general and administrative expenses to sales.
Regarding the results of SMEJ, sales decreased by 10 percent and operating income decreased 81 percent