By PETER SKARZYNSKI and LLOYD SWITZER
December 16, 2003

By itself, the $3 billion and 20,000 job downsizing now underway at Sony won't reinvigorate the company. Neither will the merger of its music division with Bertelsman. The change that is needed will have to affect the philosophy of the company. Is such a thing possible? The hyperfast world of consumer electronics demands innovation, not just renovation. The good news for Sony is that they have already taken the first steps.

The elements for a new era are already there: the company has the willingness to bet and win on original ideas, and one of its strengths -- now flagging, by the way -- is keeping up with the pace of changes in the consumer electronics world.

When Sony elevated Ken Kutaragi to the head of Sony Computer Entertainment in 1999, it showed, perhaps inadvertently, that rebels get rewarded. Mr. Kutaragi, the wunderkind engineer-turned-executive, started with the company in 1975. He produced a series of breakthrough products, driving Sony to make visionary leaps into new areas, instead of taking baby steps to extend established lines.

Sometimes Sony listened to Mr. Kutaragi, sometimes it didn't. The company's rejection of his liquid-crystal-display projector in the 1970s lost a ground-floor opportunity in a new industry. But Sony's embrace of his faith in a high-end computer game business, namely Play Station, brought the company early leadership in a business that might not have existed at all but for one engineer's vision. Created in the early 1990s, the highly profitable Play Station constituted 60% of the company's total profits and about 13% of its revenue in 2002.

Now it's time for Sony to institutionalize the rebel's revolution by taking three crucial steps. Firstly, install innovation in the way Sony does business. That means that the best parts of the "old" Sony should reign in a new Sony. Most people have forgotten that the very sight of a personal stereo was once bizarre. Yet the lonely introduction of the Sony Walkman in 1979 turned out to be inspired. Personal, portable music devices provided a critical platform for businesses such as MTV, and arguably helped drive the explosion of the most successful consumer-electronics product in history, the compact-disc player.

Bold new products can mean bold new profits and whole new worlds. The Walkman is the signal Sony example. Meanwhile, the company's most recent showpieces are the Vaio computer and Wega television, which are only variations on familiar themes. Sony's future lies in Kutaragi-style bold steps.

Secondly, Sony needs to build on its skill in keeping up with the pace of the market. The features and functionality of Vaio and Wega well reflect the trends of the consumer electronics markets: video- and music-friendly computer systems with high-end display and sound capabilities, and high-definition televisions with full-featured, user-friendly controls and eye-catching designs.

But more critically, Sony's Everquest has done more than keep pace with the market -- in this case, for online computer games. With a half a million or more players worldwide, and an average per-player playing time of over 22 hours a week, Everquest represents a quantum leap, a true business-model innovation. An online fantasy game enabling players to role play, Everquest has proved so successful that characters and treasures that only exist in the computer world are traded on eBay. It drives demand for software enhancements to the game, new hardware to improve performance, and opens the door to future business opportunities.

Thirdly, bring business innovation into all corners of the organization. Sony is the only company in the world that spans such a broad gamut of consumer electronics. Video-gaming hardware, entertainment software from music to movies, headphones, cameras, PDAs -- an organization as resource-deep as Sony has the opportunity not only to set the standard in dozens of product lines, but also to create new and innovative products and services that others cannot. Sony's various engineering and design teams will literally be closer together after the restructuring. With so many creative forces so closely concentrated, the company has a rare opportunity to create incentives for new ideas that cross division and product lines.

Mr. Kutaragi invented the high-end video game industry by first envisioning a product that was beyond the imagination of the rest of the world. He then built a critical profit center for Sony on a model as old as the razors-and-blades lesson from business school: sell low-margin hardware as a platform for high-margin software. The result was a company that generated 60% of Sony's profit in 2001-2002. Sony's strengths in content and technology suggested the natural synergies that Mr. Kutaragi found -- but it took a rebel to see them and transform them into a business.

As Sony evolves, rebellion to innovation should be its new foundation. Imagine the possibilities for Sony if the Kutaragis of tomorrow come up in a company where encouragement to innovate is the very fiber of the company. The next Walkman may not be that far away -- nor the next Ken Kutaragi.

Mr. Skarzynski is chief executive officer and Mr. Switzer is a director at the strategic-consulting firm Strategos, which has offices in Chicago, San Francisco and London.