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Sony (SNE) announces big loss. What's going on with its phones?

Sony announced its earnings report for the second quarter of 2014. While the company announced a better than expected loss, Sony's share of the mobile market around the world continues to struggle.

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Sony Corp. President Kazuo Hirai leaves after a press conference at the company's headquarters in Tokyo. Sony's losses ballooned to 136 billion yen ($1.2 billion) last quarter as the Japanese electronics and entertainment company's troubled mobile phone division reported huge red ink. The poor result released Oct. 31 was despite a 7 percent increase in quarterly sales to 1.9 trillion yen ($17.3 billion) as performance improved in cameras, TVs and game businesses.

Toru Takahashi/AP/File

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Sony has been facing problems for years. Falling profits and losses in major markets have caused the company to struggle to find a solution. And Friday's earnings report showed signs of the same but with a slight glimmer of hope. 

On Friday, Sony released its earnings report and announced a less-than-expected net loss of $1.22 billion for the second quarter of the year. For the past three-months, Sony recorded an operating loss of $770 million. But some divisions in Sony did well over the quarter. Sales of video games increased 83 percent over the quarter and recorded a $226.3 million operating profit, and sale's of Sony's image sensor, used in the Apple iPhone, rose over the quarter. But Sony's mobile division continues to drag down the entire company. If it were not for a $15.8 billion write-down of its mobile business, Sony said it would have had a better quarter. 

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"We are on our way to achieving 400 billion yen ($3.5 billion) in operating profit next year," Kenichiro Yoshida, Sony's chief financial officer, declared at a media briefing on Friday, according to Reuters. He said the company would have recorded a profit this quarter, but the write-down of the mobile market put the company in the red.

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Sony's mobile business continues to struggle to catch on around the world. Sales declined in Western Europe, one of Sony's biggest markets, and the company remains not competitive in other markets around the world. A year ago, Sony announced that the mobile business would be a cornerstone of the company's turnaround, but on Friday, Sony said its mobile business had a $15.4 billion operation loss. Though, the loss was largely due to the write-down.

Sony's major problem is that it hasn't been able to find its niche in the smart phone market. Buyers haven't found the company's phones compelling enough to buy.

"They mainly try to compete directly with Apple in the high end of the market, and they struggle to convince Apple users to move to the Sony Device," Francisco Jeronimo, research director at IDC, told Bloomberg. "On the low end, they are facing fierce competition from the Chinese makers as well."

Sony announced Friday it would scale back its smart phone business in China. The company will no longer sell low-end handsets in the country because it cannot compete with the low-priced domestic companies.

On average, a Sony smart phone sells for $390, which is three times higher than Chinese phone maker Xiaomi's price. "Those Chinese vendors, that are emerging around the world, they focus on price and trying to provide the best quality to users at the lowest price," Mr. Jeronimo said.

Mr. Yoshida said the company is considering shrinking its business in other markets as well but did not go into detail. With the cuts in its smart phone business, Yoshida lowered predicted sales of its phones from 43 million to 41 million, which is still higher than last year's sales of 39 million. 

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“We had debated whether it would be right to shrink our presence in the world’s largest smart phone market, but have judged what we need to do right now is to rebuild the business structure,” Yoshida said, according to The Wall Street Journal

On Friday, Sony named Hiroki Totoki as head of its mobile division unit. It's believed that Mr. Totoki can help make Sony's smart phones popular in the US market, which could turn the company's fortune. It's expected that Totoki will get reluctant US mobile carriers to begin selling Sony's phone.

"Sony's got the will to continue with its smart phone business and it's hoping income from the business improves. Todoki has reformed businesses before, so he's probably thinking of rebuilding it," Hideyuki Fukunaga, the chief executive of fund manager Investrust, told Reuters.

While Sony's phones aren't doing well in the smart phone market, the PlayStation 4 is becoming a dominant force in the video game market. By Oct. 18, Sony had sold 12.3 million consoles, while Microsoft sold only 6.1 million Xbox One consoles during that time, according to market research website VG Chartz. Because of sales, Sony increased its annual profit forecast for the gaming unit by 40 percent to $314.9 million.  

Sony's stock was up 4.14 percent by mid-morning. 


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