Without delving too much into my predilection to being anti-Sony (a predilection forged, not because I overly love the competition, but by constant mistakes and comments of alienating arrogance), a recent article in Wall Street Journal Asia painted a hugely bleak picture for Sony and their future.

It's not all the PS3 fiasco, of course. The massive Sony battery recalls of this year put a huge dent in their profits, which the cost of the PS3 — and the difficulty in mass producing them — has only deepened. Profits are down 94%. And the system is pricey, which analysts think will matter at retail, and might be made even worse by competitor price cuts.

Right now, analysts think that Sony could post an operating loss of $839M next year, which is flabbergasting. Investing analysts are saying that investors are better off putting their money elsewhere. "Holding Sony is an opportunity cost," they claim.

The full article, after the jump.

The Japanese company's consumer-electronics business has been recovering recently, but its unprofitable videogame division faces problems. While Sony is gearing up to launch its much-publicized PlayStation 3 videogame console next month, some analysts caution that the game business may take a while to get back on track, a prospect that could continue to weigh on its shares. The game business is "the biggest risk facing Sony," says Koichi Hariya, an analyst at Mizuho Securities. Sony's shares have suffered in recent months from a string of bad news. Since August, its laptop batteries have sparked mass recalls world-wide because of worries that they could overheat and catch fire. On Sept. 6, the company delayed the European launch of its widely publicized PlayStation 3 next-generation videogame console because of delays in producing a key component.

Last week, Sony cut its group net profit forecast for the fiscal year ending March 31 by 38% to 80 billion yen ($670.6 million), reflecting the cost of the battery recall and projected wider losses at its game business.

Yesterday, Sony's shares closed at 4,820 yen, down 10 yen. While its share price has rebounded from a year low of 4,340 yen on Oct. 5 it hit after the spate of bad news on the batteries and the PS3 setback, some analysts say it might fall as much as 20% over the next year.

Sony's game business, which accounted for 13% of its group revenue in the year ended March, is bleeding red ink. In the quarter ended June 30, its operating loss widened to 26.8 billion yen from 5.9 billion yen a year earlier, because of charges and research-and-development costs for the PS3. Sony expects the game segment to post an operating loss of about 200 billion yen for the fiscal year ending March before possibly making money next fiscal year.

Sony is betting that the PS3 will help it pull ahead of rival game makers Microsoft, which launched its Xbox 360 console last year and Nintendo, which is preparing to launch its own next-generation console next month in the U.S. and in December in Japan. But that plan is facing setbacks. Difficulty in mass-producing a key component of the PS3 forced Sony to push back the European launch date by four months and trim shipment plans for North America and Japan for 2006.

One major problem with the PS3 is that it's costly to make. Sony hopes that will change after the game console hits the market. If the PS3 becomes popular, Sony would be able to ramp up output, which would lower production costs per console and possibly make the game business profitable next fiscal year.

But analysts say that optimistic scenario isn't a sure bet. What is more, with competition fierce, companies may be forced to lower the price of their game consoles, a move that would cut into Sony's bottom line. "It's all about economies of scale and no pricing power," said Stefan Rheinwald, head of research at CLSA in Tokyo. CLSA recommends investors sell Sony, warning the shares could fall to 3,800 yen in the next 12 months.

Analysts say the largest risks to the game business reside in two areas. Some say there is a possibility Sony may encounter more bottlenecks in production of laser diodes, the key component behind the European delay. That could lead to more problems in shipping the consoles in time.

Others say Sony's PS3 console is too expensive and may not sell as well as Sony hopes. The company has already cut the suggested retail price of the lower-caliber version of the PS3 by about 20% to 49,980 yen in Japan. But that is still more expensive than Nintendo's Wii game machine, which will cost 25,000
yen, and Microsoft's XBox 360 Core System, a cheaper version of its game console
it plans to release in Japan in November with a price tag of 29,800 yen.

"Hard-core gamers might go for it, but when it comes to your average consumer I'm not so sure," says Mizuho's Mr. Hariya. He says he expects Sony's game segment to post a loss of 100 billion yen on an operating basis next fiscal year. Mr. Hariya rates Sony's stock a three rating on a five-tier scale,
meaning he expects it to remain within 5% of the Topix index over the next six to 12 months.

Not all analysts, however, are bearish on Sony. They say that Sony's consumer-electronics business is springing to life, helped by brisk sales of digital cameras and camcorders and improved performance at its liquid-crystal-display-television operations, which would help offset the problems at the game division. When Sony reports July-September results today, the company is likely to reveal more details of the turnaround in the electronics business, says David Gibson, an analyst at Macquarie Securities. Mr. Gibson has an "outperform" rating on Sony's stock, with a 12-month price target of 6,600 yen.

But CLSA's Mr. Rheinwald says investors may be better off parking their money elsewhere. Investors keen to invest in an LCD-TV maker, for example, might take a closer look at Sharp. Those interested in game makers might consider Nintendo. "Holding Sony is an opportunity cost," he says.

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