Will Sony’s joint venture with Ericsson kill the PSP phone before it even launches?

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Sony is working on the PSP2, and most commentators expect it to go head-to-head with the iPhone, which means that it needs to have a built-in phone. But internal politics may kill the deal before it even starts.

The PlayStation Portable 2 is go. The plan is to combine a PSP gaming device with a Sony Ericsson mobile to have an iPhone-beater ready for launch in 2011. The new console will have better graphics than the current PSP, a full touchscreen, games purchased via download and, crucially, a mobile phone built-in.

Integrating a mobile phone into the PSP is a logical move. But it is fraught with difficulties. Sony is in an exclusive mobile phone relationship with Ericsson. As I understand it, Sony is not legally allowed to ship a mobile itself: all handsets must be part of the SonyEricsson joint venture.

Which leaves Sony with two choices:

• Licence the PlayStation brand to a third-party (albeit one in which Sony has a major stake); or
• Buy back Ericsson’s stake in the joint venture.

Neither of these are easy. Sony is fiercely protective of its PlayStation brand. Not only that, but famously, the company is riddled with personal fiefdoms that don’t talk to each other. When Sir Howard Stringer was brought in as CEO of Sony, breaking down internal silos became one of his most urgent priorities. Ken Kutaragi was one of the first victims of this focus, given his propensity to alienate colleagues and limit PlayStation’s interaction with other divisions. He has now retired and been replaced by Kaz Hirai.

For Kutaragi, certainly, the PlayStation brand was so valuable that he wouldn’t even let other Sony divisions use it. While that stance has softened, it’s another thing entirely to licence the brand to an outside entity.

The alternative of buying back the third-largest mobile phone manufacturer in the world won’t be a walk in the park either. The company is a 50:50 joint venture between Sony and Ericsson. It has lost nearly over €600 million in the past two quarters and saw sales collapse by 36% in the first quarter of 2009 to €1.7 billion.

So while SonyEricsson may not be the best performing business in the world, it is a strategic asset for Ericsson, who are unlikely to sell it cheaply.

Stringer and Hirai have to decide on whether taking on the iPhone is worth the risk of giving up control of the PlayStation brand or the huge stretch of solving the SonyEricsson relationship. My guess is that they will decide to go for buying back the Ericsson stake, but it will be a long and tortuous path.

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