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How Apple Inc. (AAPL), Smartphones, and Tablets Are Killing Sony Corporation (ADR) (SNE)

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There has never been a technology that took over our lives like smartphones. After International Business Machines Corp. (NYSE:IBM) released its first PC in 1981, it took nearly 20 years before 100 million PCs were sold a year. We’re now closing in on six years since the first iPhone’s launch, and more than 200 million smartphones were shipped last quarter alone. Hot on the heels behind smartphones are tablets, which look poised to overtake PC sales themselves within the next three years.

If the PC was like vines slowly overgrowing the technology space, then the smartphone and tablet have been wildfire, moving fast and destroying everything in their path.

While the media has focused on how mobile products — both smartphones and tablets — threaten PC-dependent companies such as Microsoft Corporation (NASDAQ:MSFT) and Dell Inc. (NASDAQ:DELL), those companies are just a small part of a storyline in which all consumer electronics-spending is being shaken up. The truth is, the damage mobile spending is doing to Microsoft is nothing compared with how the trend is ravaging Sony Corporation (ADR) (NYSE:SNE) .

Even worse, the reality is that we’re now ending a first phase of the mobile transition, and the next phase could be even more damaging to the company and its peers.

Let’s take a look at Sony Corporation (ADR) (NYSE:SNE), and why the future is about to get a lot more dangerous.

Sony Corporation (ADR) (NYSE:SNE)Sony: It’s really just a bank
It’s nearly impossible to avoid Sony Corporation (ADR) (NYSE:SNE). With its TVs, video-game systems, movie studio, and record label, the company is a dominant media force. Yet if you think Sony is primarily a consumer electronics and media company, you’re wrong.

Shockingly, almost all of Sony Corporation (ADR) (NYSE:SNE)’s profits come not from home electronics, but instead from its financial services segment. Yes, Sony Corporation (ADR) (NYSE:SNE) has become really just a life insurance company. Just look at how things shake out at the company.

Segment Operating Profit (Millions of U.S. Dollars) Sales (Millions of U.S. Dollars)
Financial Services (Life Insurance, Banking) $1,595 $10,590
Music (Sony Music) $448 $5,373
Movie (Sony/Columbia Pictures) $414 $7,981
Game (PlayStation) $356 $9,768
Imaging (Cameras) $226 $9,238
Mobile Products (Cell Phones) $88 $7,556
Devices (Components and Chemicals) ($269) $12,456
Home Entertainment and Sound (TVs, AV Equipment) ($2,466) $15,570

Source: S&P Capital IQ. Figures are from the trailing 12 months of operations.

Sony Corporation (ADR) (NYSE:SNE) is an absolute force in most these segments. In music, it’s the second largest record label, while its movie studio’s films raked in $1.8 billion in the U.S. last year, enough to beat Time Warner Inc (NYSE:TWX) and The Walt Disney Company (NYSE:DIS) to make Sony the highest-grossing studio. Finally, its PlayStation line-up sold more than six times the next closest video game console early last decade during the reign of the PlayStation 2. While Sony has seen less success with the PlayStation 3, it’s still a dominant player in video games.

Yet the one thing most consumers had no idea Sony was involved in — life insurance and banking — is literally more profitable than its video games, cameras, music label, and movie studio, combined.

Apple Inc. (NASDAQ:AAPL): 628 times more mobile profits than Sony
While Sony’s banking arm churns out most of the company’s profits, most of its sales and infrastructure lay in other units. Two of the most deeply ailing are its mobile-products and home-entertainment division.

Mobile products is slightly profitable before taxes. However, its $88 million in pre-tax operating profit is laughable when stacked up to Apple Inc. (NASDAQ:AAPL)’s $55.2 billion in profit during the same period that’s driven largely from the iPhone. For those of you who like really big numbers, Apple Inc. (NASDAQ:AAPL)’s operating profit is 628 times larger than Sony’s mobile profit.

The irrelevance of Sony’s mobile division extends beyond the results of that segment itself. iPads sell for a higher cost than many large televisions. Sony’s digital camera sales are off as smartphones increasingly become the point-and-click camera of choice. Blu-ray has never taken off the way DVD sales did last decade as consumers use tablets to buy digital media, or increasingly stream it from services like Netflix, Inc. (NASDAQ:NFLX).

Sony Corporation (ADR) (NYSE:SNE) is at the mercy of all these changes, and its mobile unit isn’t relevant enough to offset its losses elsewhere.

Buy a smartphone, not a camera. A tablet, not a TV.
The problem is that while consumer spending isn’t a zero-sum game, it’s close. In 2012, the industry was worse than a zero-sum game, with total spending falling. In 2013, consumer technology spending is supposed to bounce back. However, even optimistic projections expect growth to be in the low single digits this year.

If consumers spend their money on a tablet, that doesn’t mean they’re expanding their electronics spending. It means they’re forgoing another purchase like a new TV.

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