Sony 2007 Annual Report Download - page 87

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extent discretionary. Accordingly, weakening economic conditions
or outlook can reduce consumption in any of Sony’s major
markets, causing material declines in Sony’s sales and operating
income. In the fiscal year ended March 31, 2007, 25.6 percent,
26.9 percent and 24.6 percent of Sony’s sales and operating
revenue were attributable to Japan, the U.S. and Europe, respec-
tively. If economic conditions in Japan, the U.S. or Europe
deteriorate, or if the effects of international political and military
instability depress consumer confidence, Sony’s short- to mid-
term sales and profitability may be significantly adversely affected.
In addition, since Sony’s sales in Other Areas are growing, its
sales and profitability may also be affected by future political,
economic and military uncertainties surrounding those areas.
Large-scale investment is required within the Game and
Electronics segments, particularly during the development
and introductory period of a new gaming platform.
Within the Game segment, providing and developing products
that maintain competitiveness over an extended life cycle requires
large-scale investment relating to research and development,
particularly during the development and introductory period of a
new platform. In addition, large-scale investment relating to capital
expenditures and research and development is also required
within the Electronics segment for the fabrication and manufac-
ture of key components, including semiconductors supplied to
the Game segment, which are used in products within the
Game segment. Moreover, it is particularly important in the
Game segment that these products are provided to consumers
at competitive prices to ensure the favorable market penetration
of the platform. Should the platform fail to achieve such favor-
able market penetration, there is a risk that this investment, or a
part thereof, will not be recouped and the carrying value of the
related assets will be subject to an impairment charge, resulting
in a significant negative impact on Sony’s mid-term profitability.
In addition, even if Sony is able to sufficiently recoup its invest-
ment, it is probable that a significant negative impact on Sony’s
operating results could occur during the introductory period of
the platform. Further, if the platform is ultimately successful, it
may take longer than expected to recoup the investment,
resulting in a negative impact on Sony’s profitability.
An example of such a significant negative impact during the
introductory period of the platform is the PS3-related charges
which resulted in a loss of 232.3 billion yen within the Game
segment for the fiscal year ended March 31, 2007. This loss
reflected a negative margin arising from the sale of the PS3 at
strategic price points lower than its production cost during the
introductory period. (Refer to “Game” section of “Operating
Performance by Business Segment” in “Operating Results.”)
Sony’s Game and Electronics segments are particularly
sensitive to year-end holiday season demand.
Since the Game segment offers a relatively small range of
hardware products (including PS2, PSP and the PS3) and
a significant portion of overall demand is weighted towards
the year-end holiday season, factors such as changes in the
competitive environment, changes in market conditions, delays
in the release of highly anticipated software titles and insufficient
supply of hardware during the year-end holiday season can
negatively impact the financial performance of both the Game
and the Electronics segments. For example, in the fiscal year
ended March 31, 2007, the introduction of the PS3 in Europe
was delayed from the scheduled date of November 2006 to
March 2007 because of a delay in improvements in the mass
production yield of the blue-violet laser diode, a key device for
the Blu-ray Disc drive equipped in the PS3, which was designed,
developed and manufactured internally at Sony. Also, a supply
shortage of the PS3 arose during the 2006 year-end holiday
season in Japan and North America.
The Electronics segment is also dependent upon year-end
holiday season demand and, to a lesser extent than the Game
segment, is susceptible to weak sales and supply shortages
that may prevent it from meeting demand for its products during
this season.
The sales and profitability of Sony’s Game segment
depends on the penetration of its gaming platforms,
which is sensitive to software lineups, including software
published by third parties.
In the Game segment, the penetration of gaming platforms is
a significant factor for sales and profitability, which may be
affected by the ability to provide customers with sufficient
software lineups, including software published by third parties.
Software lineups affect not only software sales and profitability,
as in many other content businesses, but also affect the
penetration of gaming platforms, which can affect hardware
sales and profitability.
Operating results for Sony’s Pictures segment vary according
to the cost of productions, customer acceptance, and
competing products.
Operating results for the Pictures segment’s motion picture
and television productions can materially fluctuate depending
primarily upon the cost of such productions and acceptance
of such productions by the public, which are difficult to predict.
In addition, the commercial success of the Pictures segment’s
motion picture and television productions depend upon the