Sony Sucks

Blog Hog JVL writes that Sony (SNE) is committing corporate suicide by patenting a technology that would make unregistered software unusable in its machines.

In other words, if Sony puts this technology into action, you could no longer play borrowed, used, or rented games on your Playstation.

JVL goes on to mention Sony's rootkit CD copy-protection software problems and tellingly concludes that he's leaning towards the next-generation Xbox platform.

Should I listen to JVL, who anachronistically reveres his Sega Dreamcast, circa 1999? And should you, the reader, listen to the Pig, who last bought a video game system two years ago? For his Mom? And it was a PS One, at that.

Yes. Because I'm not trying to figure out which upcoming video game console is superior. I want to know if Sony's shenanigans are going to alienate video game retailers and consumers. I want to know how much Sony sucks.

Let's kick Sony while it's down with some news reports.

First, Pitchforkmedia.com stomps on Sony for its rootkit software:

Sony Music Sued Over Anti-Piracy Software

Jonah Flicker and Amy Phillips report:
In the slow and perhaps inevitable movement towards microchip implantation of the entire human race, Sony BMG Music just took the lead. According to the Washington Post, a class action lawsuit filed in Los Angeles Superior Court November 1 alleges that the label's anti-piracy software, installed in several recently released CDs, is harmful to computers.

The suit claims that when a copy-protected CD is loaded onto a hard drive, it installs a hidden program known as a "rootkit," which not only keeps track of the computer's activity, but depletes the drive's resources in the process. So Sony is basically eating up your hard drive space while keeping track of all the porn you watch, just because you actually spent money on a My Morning Jacket CD.

Thanks, guys. This is even better than getting the RIAA to sue us.

The rootkit also makes the computer more susceptible to viruses. Sony falsely states that its copy-protection software can be easily removed, when in reality, getting rid of a rootkit can be damaging.

Here's the crux of the suit, straight from the legal papers: "As a result of Sony's failure to disclose the true nature of the digital rights management ('DRM') system it uses on its CDs, thousands of computer users have unknowingly infected their computers, and the computers of others, with this surreptitious rootkit. This rootkit has been responsible for conflicts within computer systems, crashes of systems, and other damage."

The suit, which accuses Sony of "fraud, false advertising, trespass, and violation of state and federal statues prohibiting malware, and unauthorized computer tampering," claims that the suspect software has been included on certain Sony BMG Music CDs since this spring. Albums to watch out for include Amerie's Touch, My Morning Jacket's Z Kasabian's Kasabian, Neil Diamond's 12 Songs, Cassidy's I'm a Hustla, Kings of Leon's Aha Shake Heartbreak, and, appropriately, the Bad Plus' Suspicious Activity and the Coral's Invisible Invasion, among others.

In short: if you're about to load that new My Morning Jacket disc onto your hard drive, STOP. Sell the album back to the record store and buy something on Dischord.

Then Reuters gets in on the ultraviolence pile-on by reporting hackers exploiting the rootkit software's security breach:

Hackers use Sony BMG to hide on PCs

Thu Nov 10, 3:35 PM ET

AMSTERDAM (Reuters) - A computer security firm said on Thursday it had discovered the first virus that uses music publisher Sony BMG's (6758.T) controversial CD copy-protection software to hide on PCs and wreak havoc.Under a subject line containing the words "Photo approval," a hacker has mass-mailed the so-called Stinx-E trojan virus to British email addresses, said British anti-virus firm Sophos.

When recipients click on an attachment, they install malware, which may tear down a computer's firewall and give hackers access to a PC. The malware hides by using Sony BMG software that is also hidden -- the software would have been installed on a computer when consumers played Sony's copy-protected music CDs.

"This leaves Sony in a real tangle. It was already getting bad press about its copy-protection software, and this new hack exploit will make it even worse," said Sophos's Graham Cluley.

Later on Thursday, security software firm Symantec Corp. (Nasdaq:SYMC - news) also discovered the first trojans to abuse the security flaw in Sony BMG's copy-protection software. A trojan is a program that appears desirable but actually contains something harmful.

Sony BMG's spokesman John McKay in New York was not immediately available to comment.

I think Sony's going to pay for these clumsy manoeuvers. At the very least, Sony's going to pay the class-action attorneys filing suit.

The music business is in a downward spiral. The multinational record labels, including SonyBMG, are struggling with plummeting sales as iTunes, file-sharing, and downright thievery proliferates. The money made from people replacing their vinyl music collections to digital compact discs is ancient history. Young people do not miss album art, or owning a physical manifestation of music. They are increasingly ignoring albums altogether, preferring to load up their iPods with individual singles. This is not a growth business for SNE, or its investors.

The movie business, both theatrically and on DVD, is declining.

So I've already discounted Sony's music and film businesses. Is PlayStation 3 the silver lining?

No video game console maker stays on top for very long. In the last 25 years, the top maker list includes Atari, Nintendo, Sega (arguably with the Genesis)), and Sony. Every console generation offers companies a new opportunity to attain the dominant position. The new Xbox is out, whereas the next Playstation could be a year away.

It's time to do the finishing move on Sony.

Net Profit Margin: 1.9%
Forward P/E: 51.6
PEG: 5.58
ROE: 4.70%
ROA: 1.40%
ROIC: 3.80%
12-Month Return: -5.6%
3-Year Return: -21.6%
Consensus Analyst Recommendation: Moderate Sell
Free Cash Flow: '01:692.4; '02:2,782.9; '03:4,709.1; '04:1,806.9; '05:1,802.2

These are abysmal numbers, care of SmartMoney.com and Morningstar.com. An attractive PEG approaches 1.0, or goes below. 2.0 is ugly. 5.58 is unspeakable. The P/E is ridiculously rich. The free cash flow is down significantly since '03, and the return for investors has been consistently negative.

Finally, in analyst-speak, you don't often see anything below "hold", since everyone knows that "hold" really means "sell". When you see "moderate sell", that means SNE effing sucks.