Sony and Olympus: what does it mean?

Following the accounting scandal that saw former CEO Michael Woodford ousted, Olympus’ coffers were looking decidedly empty; at that point, many potential suitors were rumoured. It turned out that Sony was the one whose offer was accepted. In a share transfer and cash deal – completed about a month ago – Sony pumped US$645 million into the company, to hold a total of 11.5%. What’s more interesting is that on most of the major business sites, this wasn’t reported as a transaction to invest in the cameramaker; rather, Olympus was frequently referred to as a ‘world leader in medical imaging’.

Although photographers know and love Olympus as the manufacturer of various quirky cameras and small systems, the truth is that margins in the medical industry – anything with ‘surgical’ or ‘medical’ in its name means an extra couple of zeroes on the end of the price tag – are much, much higher than the camera business. Like Nikon, it’s been making a good chunk of its income from something other than cameras for a long time. (I don’t know how much it makes from dictaphones these days, though.)

I’m going to take off my photographer hat now and wear my analyst/ M&A/ consultant one, for a bit of change of pace. Let’s put the pieces together.

• A diversified electrical consumer-goods conglomerate makes significant investments in a very specialized company.
• Sony themselves have been on shaky ground: for Q3 2012, they posted a $338m profit on $22.45b of revenue; a neat reversal of the $1.1b loss made on slightly less revenue during the prior year. Interestingly, a good portion of the profit from 2012 was made due to the disposal of a chemicals business. Note: we’re talking roughly 15% operating margin before tax here. Compare that to Apple’s $35b revenue and $8.8b profit for the same period – 25%. 
• Sony now supplies sensors to Olympus for both the current M4/3 products as well as its compacts; it may even OEM some of those compacts – who knows?
• Sony itself isn’t exactly taking the camera market by storm as it intended – response to the SLTs has been somewhat lukewarm, and the NEX series might sell reasonably well in Japan, but I see very few people carrying them anywhere else. The RX100 and RX1 compacts are interesting, but priced too high to be mass-market.
• Arguably, the OM-D is probably the best option for M4/3 users at this point – it’s a great blend of light, small, full-featured, responsive and high image quality. Even the new GH3 is believed to use a derivative of the same sensor.

Now, if this were any country other than Japan, I’d say this is the beginning of the end for Olympus. The trouble is, Sony isn’t exactly on a strong footing either, which means they may not have the resources required for a complete takeover. And being Japan, the conglomerates and cartels have existed for as long as business has been done; it might not make sense on initial examination, but ensuring the competition stays at a relatively similar level means that every stage of development can be recouped and monetized to the maximum*. In the long run, this is good for the industry, but it does milk the consumers – of course, you always have a choice if you want to go for the next incremental upgrade or not.

*Have you ever wondered how it’s possible for Nikon and Canon to respond to each other’s new product launches so quickly? There’s no way Nikon announced a D600 and then Canon designed and released a response within a week – the product design time, marketing campaign design, booking media etc – takes at least 6-9 months. I’ve heard from a number of industry insiders – some very senior indeed – that this is not just a repeatedly serendipitous coincidence. And then there’s the obvious one of Sony supplying sensors to competitors – if you wanted to kill the competition, just cut supply of the most critical component. Here’s the interesting bit: if sensors were more profitable, why make cameras? And if cameras were more profitable, why supply sensors? Yet Sony does both.

From a business standpoint, the investment makes sense for Sony: it’s hedging. In case the NEX line eventually doesn’t make it, at least they have their foot in the M4/3 door. The numbers make a compelling argument: in 2012, 12/20 of the top sellers in Japan (traditionally a bit different to the rest of the world, but also a bit ahead of the trend curve curve) – representing a whopping 47.2% of all mirrorless cameras sold – were M4/3 cameras; of this, Olympus had 25.8%. Sony had 18.4%.

Let’s take out the crystal balls and photographers’ caps for a moment: what does this mean for both companies, and both systems, long term?

Status quo. This is the obvious answer, and almost certainly what will happen in the short to medium term. The market shares aren’t far apart enough to justify culling of one system or the other; if anything, both companies will continue to sell as many cameras of whatever type they can manage. Death of either mount would be deeply embarrassing to the parent company.

NEX dies. I see this as being the most plausible scenario; in effect, they’re competing against themselves. And it wouldnt’d be the first time Sony has bid goodbye to a product that was a good idea – Betamax, for instance – but poorly implemented; in theory, the NEX mount should offer better image quality than M4/3, but I’m just not seeing as much of a difference in practice as you would expect. What I find interesting is that most of the time, even if cameras share the same Sony sensors – the Sony version seems to have the worst image quality. The NEX system just doesn’t have the diversity to compete with M4/3, not is it likely that this is ever going to change due to the costs required and the type of users it attracts. A good portion NEX shooters are compact upgraders of beginners rather than experienced photographers seeking a second system; the conversion rate to wanting to buy more serious/ niche lenses or accessories is therefore much lower. Couple that with a smaller market share to begin with, and investment here looks like a poorer proposition: why spend the same money developing a lens for perhaps 10m potential users instead of 100m, when the development costs would be nearly the same? Sony exiting the NEX market would probably mean transferring existing efforts to support Olympus M4/3 development – which might result in some very interesting products, and even hotter competition for Panasonic.

Olympus exits the camera business. This one I don’t see happening, but then again, even stupider decisions are made on a daily basis in most large companies thanks to the power of decision by consortium, so we never know. And Olympus has that rather profitable and even more dominant medical imaging (mostly endoscopes, running anywhere up to US$100k apiece) business. But on the face of it – it just doesn’t make sense to exit a market in which you are the leader. Even if we reach a sensor development wall at some point that makes image quality directly proportional to sensor size and nothing else, I don’t see the difference between APS-C and M4/3 being large enough to make a difference for most consumers (and they are the bulk of the buying market) – they’d either buy what they’re already familiar with, or whatever has the most compelling advertising.

Every major shift in technology brings about an accompanying shuffle in the players – digital was no different, and we saw the death, absorption and acquisition of many long-standing names in the business. Though things have stabilized somewhat over the last few years, I think we’re going to see another phase in which the big boys fight it out for diminishing growth; once we reach saturation point, the only way forward is to innovate. In fact, the mobile phone industry was a good example: until the iPhone came along in 2007, every successive generation wasn’t that different; there was no compulsion to buy on the part of the consumer. In fact, I feel we’re approaching that point again today – it seems pretty much everybody has an iPhone, and upgrading every cycle is both expensive and stupid – it seems the new ones aren’t always better than the ones they replace.

The same goes for cameras. Note that the cameras which are getting the most attention – and in most cases, sales – are those that dare to break the mould and challenge existing preconceptions. The RX100 has taken the compact world by storm; the RX1 should have, but price point killed it (I have a feeling it’s an exploratory product for a cheaper, more mass-market appeal successor); Fuji’s X series has taken off in a big way – the only thing that’s holding it back from gobbling up even more market share is usability.** There’s no real reason why we should be still using film-shaped cameras other than legacy design and user familiarity; but at the same time, designs that are too radical and unintuitive (Sony F828’s buttons, anybody?) won’t go the distance due to lack of widespread adoption, either.

**I looked at the X-Pro1 and nearly switched on spec: here was a system that gave me all of the lenses I needed; a small body and rangefinder-like experience, and of course high image quality. Then I used one, and was instantly reminded of why I sold my X100.

Those companies who have trouble innovating will have trouble surviving. Though both Sony and Olympus have been through their periods of ups and downs, both companies have a history of innovation – we can only hope their engineers get out of their silos long enough to cooperate and rope in a few real photographers in the process. MT

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