What Sony Ericsson Must Do To Stage a Comeback

Sony Ericsson recently reported huge losses for the second straight quarter, for which it blamed the struggling economy. The results included a $240 million quarter loss and a 21 percent drop in phone shipments, garnering a vote of low confidence among analysts. And as Dick Komiyama, president of the joint venture between Sony (s sne) and Ericsson (s ericy), noted, the global handset market is contracting — in other words, the bleeding won’t stop anytime soon.

But Sony Ericsson faces more problems than most in that its phones don’t do anything particularly well. If it wants to avoid further losses, it needs to focus, notably on improved OS design, open systems, and flexible media integration.

Company Q1 2009 Phones Shipped Q1 2009 Revenue Q1 2009 Profit
Sony Ericsson 24.2 million $3.82 billion – $245 million
Apple 4.36 million $10.17 billion + $1.61 billion
Nokia 113.1 million $16.67 billion + $751 million

Apart from the Nokia-styled (s nok) G705u, Sony Ericsson has failed to push the design envelope, impairing its phones with stale ‘candybar’ designs and small screen sizes. Most critically, its phones’ best features have been sabotaged by uneven executions. For example, 2008’s Xperia X1 phone has sleek media menus and direct YouTube support, but transitioning between productivity-heavy applications on its WinMo 6.1 OS is a mess. Similarly, the W890i has excellent audio fidelity and music features (like a MusicDJ that helps you compose ringtones), but it’s WiFi-free and its keys are uncomfortably tiny.

In order to truly find success in the mobile market, Sony Ericsson needs to:

  • Build media-friendly phone UIs that take better advantage of its Gracenote metadata software. Easier integration with wireless hardware (from cars to stereo systems) will allow people to stream content between all gadgets, not just Sony devices (See: PSP with PS3). While you can already do this to some extent, existing Sony Ericsson apps don’t make the process any smoother. Flexible apps would prompt people to use them more and increase a phone’s value.
  • Include visually dynamic software, like Microsoft’s (s msft) MixView music recommendation engine. It would give people a direct incentive to use Sony Ericsson’s Play Now Plus download service, which is also hampered with DRM music.
  • Build a new operating system. Other phone makers have bypassed Sony Ericsson with a simpler OS and faster transitions between apps, as mentioned above. The company has promised an Android OS phone by the end of the year as well as an improved Windows Mobile 7.
  • Keep all handset prices competitively low. With their sub-$200 Blu-ray players, Sony and Samsung found out this winter that affordable products from big-name brands are the most successful in a bad economy.

Sony Ericsson also needs to simplify by cutting its number of phone models. Counting CES announcements, there will be 24 phones laced with its Project Capuchin API. That’s too many. The company succeeded with mid-market customers when ‘high-end’ features were the province of business users, but that ended when the iPhone brought multimedia and web access to the mainstream. Its newest phones do include high-end features but they’re split between the Cyber-shot and Walkman lines. One phone has an 8-megapixel camera, but doesn’t have gesture control; another has shake-shuffling without camera face detection. Placing the best features in one high-end phone would create an excellent competitor for the Palm (s palm) Pre and the iPhone (s aapl).

Sadly, Sony’s business plan centers around maintaining legacy systems and saturating the market with multiple phones (even if evidence in the last few years suggests customers don’t care about brand loyalty and expect the full feature suite), so don’t expect such an approach to change anytime soon. At the very least, Sony Ericsson should create one major Walkman phone, one photo phone, and one low-priced web/business phone that combines the improvements already mentioned. The rest should be discontinued.

Greater openness also means taking a risk with gaming applications. Recently, Sony rejected Ericsson’s idea for a PSP phone, probably to avoid diluting the strength of the console. But a new focus on open-source, App Store-like gaming development needs to extend to Sony Ericsson phones. If not, Nintendo might get there first and jump further ahead of its rival.

If Sony Ericsson doesn’t make some of these changes, it will continue its recent pattern of bringing features a year behind its competitors — and its decline will continue.