With the intention of capturing a greater share of the fast growing smartphone market, Sony Corporation has finalised a deal to buy out Ericsson’s share in Sony Ericsson for Euro 1.05 billion. With this, the Japanese company will bring to an end a decade of collaboration with Swedish network equipment vendor Ericsson.

The deal is important for many other reasons as well. It gives Sony an opportunity to catch up with its rivals and, if it leverages its strengths correctly, even overtake Samsung, LG and Apple in the consumer electronics market. The deal, moreover, gives Sony ownership of several handset patents held by Ericsson. Patents are becoming increasingly important as smartphone and tablet makers like Apple and Samsung are often involved in legal battles to assert control over many elements of smartphone function and design. In early 2011, Sony teamed up with Apple, Microsoft and three other companies to purchase more than 6,000 patents from the bankrupt Canadian technology company Nortel for $4.5 billion.

Google, Inc. too has been working on increasing its patent holdings. In August 2011, the company announced a deal to purchase Motorola Mobility Holdings, Inc. for $12.5 billion as part of that effort.

Patents apart, the Sony-Ericsson deal will also enable Sony to integrate the joint venture’s (JV) output with its own range of products and content. Up till now, Sony’s tablets, games and other consumer electronic devices had been kept separate from the phones sold and created by Sony Ericsson. Industry analysts believe that the world’s ninth largest handset maker can only succeed in attracting avid gadget users away from its rivals by being fully integrated into Sony’s wide portfolio of devices, and getting access to the Japanese electronic giant’s entertainment assets like PlayStation and music catalogues. In a press statement, Sony stated, “The deal will enable it to include phones into its four-screen strategy, which aims to offer content and interconnect smartphones, laptops, tablets and televisions.”

As for Ericsson, the stake sale will insulate its profit and loss account from the financial volatility that has characterised the JV. It can now channelise its resources towards other elements of its networking business. “We will now increase our focus on enabling connectivity for all devices, using our research and development, and industry-leading patent portfolio,” said Ericsson in a press statement.

The boards of both companies have approved the buyout deal, which is subject to regulatory approval. Sony and Ericsson expect the deal to close by January 2012.

Journey so far

The JV, formed in October 2001, has been successful with its line of Walkman-branded music handsets and Cyber-shot camera phones. The company’s global market share for mobile phones reached a respectable 9 per cent in 2007, according to research firm Gartner.

However, it has had trouble gaining traction in the fast moving mobile handset business. It trails companies like Nokia and BlackBerry maker Research In Motion, and smartphone makers like Apple, Samsung and HTC, which have been quicker and more innovative in launching feature-rich smartphones.

Sony Ericsson’s market share has, in fact, been plummeting since 2007, when Apple kicked off the smartphone revolution by launching its first iPhone. In 2009, its market share stood at 4.5 per cent, and fell sharply to 2.6 per cent in 2010.

The JV’s quarterly net profit dropped from $67.26 million in the quarter ended September 2010 to a break-even level in the quarter ended September 2011. Also, its quarterly sales fell from $2.2 billion to $2.18 billion in the quarter ended September 2011. The number of units shipped fell from 10.4 million in the quarter ended September 2011 to 9.5 million in the corresponding quarter of the previous year, registering a 9 per cent drop. This was mainly on account of the decline in feature phone shipments (even though smartphone shipments increased).

The road ahead

The deal has evoked a positive response from both investors and analysts. However, the takeover is just the first step towards regaining a significant foothold in the handset market.

The company has so far failed to compete effectively in the smartphone market, which is dominated by its rivals. Sony, therefore, will need a flagship phone that can compete with handhelds like the iPhone, Android phones and the Samsung Galaxy series. Even though Sony does not have a powerhouse platform like iTunes or Google Apps, it has a strong foothold in many living rooms through televisions, Blu-ray players and PlayStation consoles. The company needs to integrate these aspects to create a product that can become a game changer.

While Sony Ericsson has so far sold 22 million Xperia phones since its launch in 2008, the brand still has virtually no presence in the US, the biggest smartphone market. It, therefore, needs to make inroads into the US market and develop other country-specific strategies going forward.

Net, net, with this deal, Sony has gained the flexibility and ability to react to the market and its rivals on its own. It can also develop devices it considers worthy of its coveted branding and, most importantly, control the speed at which it can act. Sony can now leverage these advantages to turn around its fortunes in the smartphone space.